Student Housing: Recession-Proof?

There has been a great deal of interest in recent years in providing off-campus rental housing for college students. Unlike the larger rental market, which is subject to economic swings, student housing is recession-resistant, and may well be practically recession-proof.

Investors should seriously consider student housing for several reasons. A wave of 75 million echo boomers started entering college in the late 1990s, and they'll be filling college classrooms for quite some time. While overall population trends bode well for the sector, college enrollment trends look even better: Between 1995 and 2014, the growth rate in enrollees is expected to exceed the growth rate of 18- to 24-year-olds, meaning a greater percentage of college-age students will be attending universities.

Lucrative investment opportunity

Ongoing research by the National Multi Housing Council (NMHC) reveals noticeable profit potential in student housing. In 2004, and again in 2006, NMHC examined changes in market rents in 64 college towns across the country.

One broad measure suggests that the median rent growth rate across all unit types was 7% over the two-year period. Of course, such a broad median figure is of limited usefulness when considering investing in a particular market, so an examination of individual college town markets is a prerequisite before investing in student housing.

Not surprisingly, of the 64 college towns we examined, many of those that recorded the biggest rent growth between 2004 and 2006 were in areas with already high housing costs.

California has some of the priciest housing costs in the country for both rental and owned housing, and California's student housing picture mirrors those high housing costs. The University of California-Irvine, Stanford University and San Jose State University all appear frequently on the list of schools with the highest rents.

The University of California-Irvine leads the list of highest monthly rents for selected studio, one-bedroom, and two-bedroom units. The average rent across all markets for a one-bedroom apartment is $606; in Irvine this unit rents for $1,481. Meanwhile, Stanford University commands the highest rent for selected two-bedroom and three-bedroom units.

Towns with more selective schools also appear regularly on the highest-rent list, including Ithaca, N.Y., home to Cornell University; Madison, Wis., site of the University of Wisconsin, Madison; and Austin, Texas, where the University of Texas Longhorns reside. This makes intuitive sense. Schools that are regularly in demand among students see commensurately high demand for housing nearby.

Conversely, some of the areas that experienced low rent growth — or that in a few cases saw rent declines since 2004 — tended to be in lower-cost areas such as Clemson, S.C., where Clemson University saw a decrease of 17% for a three-bedroom property and a surprising 44% decrease in the price of a studio unit.

Some towns with less selective universities also saw declines over the last two years, such as a 7% decline in the price of a one-bedroom apartment at Colorado State University and a 21% decline in the price of a three-bedroom unit at Virginia's Old Dominion University.

A resilient asset class

In addition to the favorable demographics that the echo boomers will create over the next decade, the non-cyclical economic nature of higher education is an important consideration. In good economic times, a college degree provides an important credential in the job market. In difficult economic times, people attend college to improve marketability and temporarily avoid a challenging job market.

Because many students today take longer to graduate, they remain in student housing longer than previous generations. In fact, almost 40% of today's undergraduates are over age 24, according to The College Board.

A comparison between the median rent increase and the Consumer Price Index's rent component over the last two years is telling. The median rent growth rate (7%) exceeded that of the Consumer Price Index (6.5%). Both measures indicate that student housing can be a great investment, and can help apartment firms weather the next economic recession.

Student housing can be a complex investment, so firms weighing that option should carefully examine the demand in the areas they are considering. Given the current and projected climate, student housing can be a superb hedge against the ups and downs of the overall rental housing market for those who are willing to do their homework.

Richard Levy is a senior research analyst and Michael Tucker is communications director at the National Multi Housing Council in Washington, D.C.

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