Today, the American economy is in an unpredictable state. No one knows exactly where it is going. Rising interest rates and inflation are causing various personal financial decisions, including consideration of how and where to invest. Historically, real estate has been one of the safest investments. Investing in real estate is safe and secured by the asset itself, and rarely will the investment lose value, and if it does, it is usually short-term.
There is a significant demand for student accommodation due to years of deferment, particularly among international students.
Student housing is one of the most predictable industries, so investing in this sector is a great opportunity for the low risk you are taking. Additionally, the property type is compelling because the stock market is unpredictable, interest rates are unpredictable, office space is unpredictable, etc., but student housing is largely predictable with long-term appeal. In short, there is no wrong time to start investing.
There are several reasons why investing in student housing properties is recession-proof. One reason is that it is very low in correlation with the overall economy. Because the demand for student housing is largely based on age, it doesn’t matter whether the economy is booming or going through a recession.
It was proven during the Great Recession of 2007-08 that student housing boomed as people returned to complete their degrees to maintain a competitive edge. The sector tends to be a great place to invest even in a recession because more people are going back to school to finish degrees or gain new skills to stay more competitive in the job market. According to the National Center for Education Statistics (NCES), US enrollment in postsecondary education grew by 4.7 percent in 2008 and 6.3 percent in 2009, the highest growth since at least 1981. In at the same time, demand increased and industry performance increased.
Overall, the student housing industry is largely recession-proof due to years of deferment, and demand is more important than ever. Additionally, many institutions limit the total number of new students they are allowed to admit to the school, making the demand even greater. Realistically, there are not enough universities for students, so there will always be demand.
One of the reasons that student housing tends to have a low correlation with the overall economy is because students go to school and universities for graduation status and the idea of personal advancement, not because of the economy specifically.
For example, people don’t buy single-family homes based on age. They buy them based on whether they can afford them, how the economy is doing, and whether they have a good, stable job. In comparison, college students go to college after graduating from high school, so the supply of student housing is very predictable.
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Consider this. Each university is its own micro-economy, and the micro market and housing dedicated to the student population varies from city to city. For example, in the state of Utah, there is a minimal supply of housing because the university is surrounded by significant mountain ranges and a large canyon running down one side, so a small area of student housing is zoned. While Texas A&M is a large school with endless amounts of land, there are many building opportunities. The main indicator of success is found in student accommodation.
Most of the student housing facilities were also built in the early 70s and 80s. Because the location was so visible and crucial, they were able to keep them full without putting any money into them. Once an old property is updated with modern appliances, new desks, new carpet, appliances, etc., the door opens to increase the rent, sometimes $100 or more per bedroom. So that creates value. It creates an upside in property value, which increases rent, ROI and overall value.
For example, at the University of Arizona, Nelson Partners has a student housing property where there were two by two rooms, meaning there were two bedrooms and two bathrooms per unit. In the 70s, these rooms were designed to be shared rooms with two people in each room. This basically made the kitchen, family room and open area too big for two people because it was designed for four people. Adding in a third bedroom, reconfiguring the family room in half, which is still plenty of room for three students, creates an additional $600 per month in our 50 units. So if you do the math, it’s a huge return on investment for reasonable property improvements.
For investors who wish to continue to grow or diversify their portfolios, even during difficult economic times, real estate investment should continue to provide secure long-term returns, especially within the student housing segment.
Patrick Nelson is the CEO of Nelson Partners Student Housing. Based in San Clemente, California, Nelson is a real estate investor and developer that operates 18 student housing properties on college campuses nationally.