It’s a good time to be a college student right now by at least one measure as student housing has gone high-end. The concrete, shoebox dorm is a thing of the past as investors and developers alike are finding benefits in amenity-rich campus housing.
Latitude, near the University of Illinois campus is a great example. The 326-bed building, completed in time for the 2016-2017 schoolyear, offers a gym and CrossFit center, multiple study spaces and an outdoor amenity deck and club house that feature a pool, hot tub, grilling, game rooms and an 80-inch TV.
At the intersection of University Avenue and Wright Street in Champaign, the building is also immediately adjacent to the main campus. While location is the bedrock of any real estate deal, in the case of student housing, it may be even more so.
Over the past three to five years, new student housing development has focused on infill, pedestrian-accessible locations on campus or as close to it as possible. There, the return on investment is more beneficial because developers can market the short walking distances and demand higher rents.
Choosing these sites tends to limit a project’s capacity, however. As larger sites close to campus become increasingly difficult to obtain, more developers are opting to deliver boutique, mid-sized student housing on smaller footprints. The suite of amenities can therefore drive up rents and make the project more profitable.
“I feel like most developers would rather do a 250- to 300-bed project right on top of campus rather than 500+ beds even a half mile off,” said Ryan Tobias, partner, Triad Real Estate Partners. Formed in 2010, Chicago-based Triad is a multifamily real estate brokerage that specializes in student housing.
The remoteness of some college campuses can also be of concern. “Construction costs have come up so much that to build out in a cornfield and get $400 rents just doesn’t make sense right now,” Tobias said.
Adam Berkoff, co-head of the Chicago real estate practice at DLA Piper, agrees. He also believes that compressed yields, rising construction costs and uncertainty about steel and aluminum tariffs are making developers more risk-averse.
“Development deals are becoming more and more challenging and I think what’s become more attractive are the urban and on-campus deals,” Berkoff said. “These are the ones that are getting done more often than not nowadays.”
Rent has also grown substantially in some of these markets, so a 250- to 300-bed building in a high quality, tier-one market could still be a $50 million plus project. There are few issues getting equity out the door from an investment standpoint.
There has also been a continued consolidation in the space with overseas capital playing a much larger part. Nearly 50% of all student housing investment in 2017 came from outside of the US. “Foreign investment is definitely on the uptick,” Berkoff said.
Partly driving this inbound revenue stream is an appreciation for student housing as a viable investment vehicle. What used to be a niche of multifamily is getting recognition for the available investment returns.
“Student housing as an asset class is becoming much more mainstream than it used to be,” said Berkoff. “I think a lot of investors view it as a class of asset that is more recession proof, but the foreign capital is focused more on the tier-one markets.”
While amenities can increase asking rents, they do require extra initial capital and steal space away from potential renters. The solution that many developers have come to is to add a retail component, such as a coffee shop or fitness facility, into a mixed-use building that caters to the public but that can also double as an amenity to student tenants.
“They are open to the public as a retail space but also open out to the lobby/common areas of the apartment space,” Tobias said. “So it becomes a win-win for everybody. It’s a retail tenant but also a building amenity. That makes a lot of sense.”
And not all amenities are created equal. While the Latitude project does include a pool, for example, space constraints don’t always make those types of features feasible.
“Pools are great, but listen, it’s cold in Illinois,” said Tobias. “They take up a lot of space, especially if you’re building in an urban location, so they’re kind of reserved for the biggest and best projects. Your more average projects focus on things that fit naturally indoors.”
For the foreseeable future, the trend in private student housing should continue to focus on small, efficient projects that maximize ROI by catering to wealthier families and offering high-end amenities. It will be interesting to see how the asset class evolves.