Purpose-built student housing remains an attractive investment following a record year in 2017. Since student housing is still catching up to demand, and boasting cap rates on par with traditional multifamily, there are plenty of development, acquisition and value-add opportunities within the sector.
When considering the long-term success of a student housing project, developers and investors are beginning to see new potential for incorporating the product type into mixed-use developments to feed continued demand and optimize returns. As student housing ventures increasingly shift towards these all-encompassing mixed-use environments, investors are asking: what factors should be considered when approaching these types of investments? As the developer of one the largest mixed-use student housing developments in South Los Angeles, here are the top factors to consider:
Student Housing Remains Strong & Stable
A fundamental driver of student housing demand – the number of college and university students in the country – is projected to continue to increase over the next several years, with the National Center for Education Statistics forecasting a 13 percent increase in enrollment for students under age 25, and an 18 percent increase for students age 25 and over, from 2014 to 2025. As such, the student housing sector remains strong nationwide.
Student housing creates the potential for several residents with strong credit (thanks to parents co-signing the leases) in a high-density living situation, as many purpose-built student housing communities have four to six beds per unit. Owners and developers are able to minimize the space occupied by each resident, while maximizing occupancy with year-round leases.
These characteristics of student housing not only make it a strong standalone investment, but also make the product type an outstanding complement to other uses, such as retail, hospitality, and office.
The benefits of placing student housing at the center of mixed-use developments is two-fold. Investors can diversify their portfolio by balancing the more stable asset class with higher-risk, higher-reward product types to optimize economic returns, as well as create a sort of ecosystem where a large cohort of student residents continuously feeds the demand for the other uses of a project.
A Built-In Stream of Demand
High-density student housing brings to a location a large population that is comprised overwhelmingly of those in the same age demographic, and that present other similar characteristics as well.
In turn, this means that student housing provides unique demand drivers for other real estate uses, making it an ideal centerpiece to modern mixed-use developments.
Standout complements to student housing include:
Retail: Busy students, especially those previously unfamiliar with the area their school is located in, or who do not have a car or quick access to public transportation, value the convenience of retailers in close proximity to school and housing. This include both daily needs retailers, as well as restaurants, entertainment, and other shopping choices that present students with easy and safe options for social excursions, and ultimately help build a sense of community. Some of the largest retailers in the country have even been adapting their models to fit into college submarkets in recent years.
Hospitality: Universities drive demand for hospitality in several ways. Placing a hotel adjacent to student housing provides an excellent location for visiting families to stay. Hotels can also host alumni visiting for sports and networking events, visiting scholars and those attending academic conferences at a university. Developers are taking note and there several projects underway across the country that place hotels near universities. For example, a development is rising directly next to Texas A&M University that includes a 250-key, 250,000 square-foot hotel and a 23,000 square-foot conference center.
Creative Office Space: Creative office space near universities present an opportunity to companies seeking to foster a presence among students and attract strong interns, student employees or prospective employees. Flexible office space can also be rented out to students studying for exams or working on group projects – exact use can shift based on evolving demand.
Location, Location, Location
All universities have their own cultures, as well as demand drivers unique to the submarket where they are located. Therefore, when deciding whether a particular college would be a fit for this type of development, or considering the scale, scope and product types of a student housing/mixed-use project, it is important to comprehensively assess the location. Submarkets with high barriers to entry present the most long-term value and reduce the chance of new competitors, so these locations are ideal.
Further, looking beyond the university to the submarket as a whole is beneficial when determining uses. While in some cases a university might be the primary draw, in more urban areas, there are many other factors to consider. For example, we are currently underway on “The Fig,” a 4.4-acre, $400 million development near the University of Southern California that incorporates student housing, market-rate and affordable multifamily housing, retail, office space, and a 298-key hotel.
A hotel of this scale is appropriate as it will not only serve the drivers that result from the university itself, but also tourism to the Exposition Park area. Tourism is expected to increase in the coming years as a result of the $1 billion Lucas Museum of Narrative Art development underway, the $270 million renovation of the L.A. Coliseum, and many other projects.
The Bottom Line
Mixed-use projects are always a balancing act, but university submarkets offer an excellent opportunity to target a stable demographic – student residents – and create an ecosystem where several different aspects feed off of each other.
By offering retail, hospitality and office space alongside purpose-built student housing, developers present an opportunity for investors to diversify their portfolio, while in turn, contributing to the success of thriving academic communities.
—John David Booty is the executive vice president of Ventus Group, a Southern California-based developer of innovative core real estate destinations that draws upon its collective experience and relationships to consider a broad range of possibilities for each unique real estate opportunity. As a USC Trojan, John David won two NCAA National Championships and had two Rose Bowl victories as a starter (including Rose Bowl MVP honors in 2007).