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Smaller Schools Draw Student Housing Investors, But Carry More Risk

Investors should be wary, since higher investment yields always come with higher risks. Community colleges have suffered from declining enrollment in recent years, for example.

Students housing investors are looking further afield in their hunt for yield—buying and developing student housing properties near smaller schools and even near community and technical colleges.

“People are getting comfortable that they can get returns in tier ‘three’ markets,” says Dorothy Jackman, managing director of student housing services for real estate services firm Colliers International.

But investors should be wary, since higher investment yields always come with higher risks. Community colleges have suffered from declining enrollment in recent years, for example. Investors and developers should balance advantages like the availability of land or low purchase prices against the strength of the school and potentially unproven demand for student housing.

New development comes to smaller schools

“Especially during the current cycle, we’ve seen an increase in development at smaller schools,” says Taylor Gunn, student housing analytics lead for data firm Axiometrics. Since 2011, developers have opened more than 4,400 student housing beds at 16 community and technical colleges, according to Axiometrics. Those school includes two-year colleges and four-year, for-profit institutions like Kaplan University and the University of Phoenix.

But the need for housing near community and technical colleges has been relatively weak in recent years. In 2014, just 6.7 million students enrolled in two-year schools—that’s 3.65 percent less than the year before, according to the National Center for Education Statistics (2015 figures aren’t available yet).

“So if we look at the national growth figure, the negative growth seen in recent years can be partially attributed to the two-year universities and four-year, for-profit universities,” says Gunn.

Investors interested in widening their search for opportunities should take care to assess the stability of the institution. For example, ITT Tech shut down its 130 campuses in September, leaving its 35,000 students without a degree.

Hungry investors bid high

Investors are hungry for assets with higher yields, even if those yields are only slightly higher than the competition. The yield from student housing investments continues to fall, following the direction of the yield for conventional apartment properties.

Investors accepted cap rates that averaged just 6.00 percent for student housing properties in the second quarter. That’s 21 basis points higher than the 5.79 percent average cap rate for conventional apartment properties, according to data from Real Capital Analytics (RCA), a New York City-based research firm. Three years earlier, student housing properties sold at cap rates averaging 6.63 percent—46 basis points higher than conventional apartment properties.

Strong demand for student housing

Still, overall, demand for student housing properties continues to be healthy. Most properties were already at least 95 percent pre-leased as of April for the new school year beginning this fall, according to Axiometrics. Pre-leasing rates tracked ahead of the last two years through April, then fell slightly below the record set in 2015.

Nationally, rents are averaging $639 a month for beds at student housing properties for this fall. That represents rent growth of 1.9 percent from the year before, according to Axiometrics.

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