college-bound

Solid Demand for Student Housing Should Continue for Years to Come

There is likely to be a pool of over 30 million college-age people every year for decades to come.

The student housing business seems to be getting set for several more good years.

“There’s definitely a need for additional housing supply over the next five to 10 years,” says J.J. Smith, president of CA Student Living, an investor and developer specializing in student housing properties.

This fall, students once again filled up student housing beds at near record rates. The percentage of available units is near historic lows, despite relatively high levels of new construction. Rents also continue to increase, on average.

How long can the good times last? Experts see strong demand through the next five years and good opportunities for carefully targeted new development.

Steady demand for student housing

The demand for student housing appears to be strong for the foreseeable future. The number of college-age people in the U.S. is increasing, and a dependably large number of them are choosing to enroll in college classes.

There is likely to be a pool of over 30 million college-age people every year for decades to come. In 2015, there were 31.2 million people residing in the U.S. who were 18 to 24 years old. The number will dip to 30.6 million in 2020, then inch slowly back towards 31 million through 2035, rising more quickly afterwards, according to an analysis of Census data by CA Student Living.

“Growth of the college age population has been decelerating in recent years, but we’re projecting this to turn positive and remain stable over the next five years,” says Taylor Gunn, director for student housing for data firm Axiometrics, a RealPage company based in Richardson, Texas.

Of those young people, the percentage who are attending college after high school continues to hold steady at a little more than two-thirds—69.7 percent in 2016, according to the Bureau of Labor Statistics. If the economy slows, that number is likely to creep up.

“That translates to a stable demand base for university enrollments,” says Smith.

By 2026, there will be 22.6 million people pursuing a post-secondary degree in the U.S., up from 20.4 million in 2017 and just 6.6 million in 1990, according to the National Center for Education Statistics.

“Also driving this continued growth are disproportionate increases in international student and graduate enrollments,” says Frederick Pierce, president and CEO of Pierce Education Properties.

Too much of a good thing?

Developers have been busing creating new student housing properties for these students. So far, the vast majority of new developments have found residents. The new buildings are typically marketed to attract the wealthiest student, who can pay the high rents that justify the high cost of land and construction.

“We advise caution in continued development of very high end, expensive projects,” says Pierce. “There is a limited universe of students who can afford the most expensive housing… there is a risk of over-building at the high end of the market.”

So far these types of developments are a small part of the total market for student housing. Only about a quarter (23 percent) of enrolled students are housed in purpose-built student housing. Of that property segment, only one bed in 10 (11 percent) is located within easy walking distance of campus, according to an analysis by student housing REIT American Campus Communities of the 68 markets where it is active.

The other student housing properties may be less expensive, but they may not provide the same value that comes with new, purpose-built communities. For example, about a fifth (20 percent) of the students enrolled in ACC’s 68 markets live in on-campus housing.

This older on-campus housing “continues to be primarily functionally-obsolete product developed for the baby boom generation—the median age exceeds 50 years,” says William Talbot, chief investment officer for ACC.

Large universities are not able to build much new on-campus housing to compete with privately-owned properties because state budget cuts have trimmed their ability to finance new projects.

“I don’t think the supply is meeting the demand,” says Jeffrey Friedman, an attorney specializing in student housing with Ginsberg Jacobs, based in Chicago.

Even a potential recession should not hurt the student housing sector too much. “As the job market begins to slow, we should see an increase in enrollment as people drop out of the workforce and go back to school or more people enroll in college immediately after high school,” says Gunn.

“We tend to see the higher enrollment during economic downturns or a more difficult job market,” she says.

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