Priced Out: Adding Affordable Units to Student Housing

Student loan figures indicate a growing affordability problem in higher education. The Federal Reserve reports that student loan debt in the United States is almost $1.6 trillion today, with 42 percent of people who attended college — which represents 30 percent of all adults — incurring at least some debt from their education. 

With a focus on technology-based degree programs, the cost to attend college is rising. But it’s not just tuition that’s going up. According to College Board, the cost of housing exceeds the cost of tuition at four-year, public universities. For the 2017-2018 academic year, students paid an average of $9,970 for in-state tuition while room and board ran $10,800.

“There’s a real need to get to the middle of the market and to build quality housing that students can afford,” says Joe Coyle, president of Michaels Student Living. Michaels Student Living is a specialized area of expertise within The Michaels Organization, a leading affordable housing developer in the United States. “Housing is a big part of what contributes to the high cost of attending college. We have to work together to find ways to mitigate this. It’s going to become more and more important.”

While the student housing industry promises luxury in many of its Class A products, there is a widening need to accommodate students who can’t always live in the “Beverly Hills” districts of student apartments or pay rents upwards of about $1,500 per bed.

So today, many cities are beginning to require that new developments offer some lower cost units. High-priced urban markets have been doing this for some years, but other cities — including Austin, Texas — between the coasts are also starting to look to developers to address the problem.

“When Austin changed the zoning in the West Campus neighborhood, which is called the University Neighborhood Overlay (UNO), they required 10 percent of units in new developments to be affordable,” says Jaclyn Fitts, director of CBRE’s National Student Housing Team. “Developers can now qualify with 10 percent of the beds. We have seen more of these efforts in urban areas, high-barrier-to-entry markets or high-cost-of-living markets.”

Texla Housing Partners, along with joint venture partner SAI, just acquired a property in the West Campus district. 21Pearl, which was built in 2014, contains 272 beds in 135 units. According to Roger Phillips, principal and CEO of Texla Housing Partners, the new ownership will continue the affordable “SMART” program.

SMART is an acronym for Safe, Mixed-income, Accessible, Reasonably-priced, Transit-oriented. It’s a policy initiative from the city intended to stimulate the production of housing throughout Austin for low- and moderate-income residents. Developers and builders of single-family, multifamily, and mixed-use developments that meet the standards in turn receive waivers of development fees, such as permitting, capital recovery and construction inspection.

For Texla at 21Pearl, 10 percent of the units will continue to be offered at 50 percent of Median Family Income (MFI) and another 10 percent at 80 percent MFI. The affordable units are required to be offered for 15 years from the first date of occupancy.

“If you want to do business in West Campus, this is the entrance fee you pay,” Phillips says. “West Campus is arguably the most desirable market in the country. You’re talking about maybe three-quarters of a mile, so it’s very dense and producing some of the highest rental rates in the country. You’re in a very select group that can afford construction, land costs and everything that’s involved with getting control of development in that market.”

Affordability requirements vary from city to city but can be determined using federal guidelines. Each fiscal year HUD publishes fair market rents. According to Jared Everett, senior vice president of university partnerships with Greystar, affordable housing is becoming an important topic for local government in markets where rental rate growth exceeds income growth.

“If you compare the national average of two and a half to three percent CPI and you have markets like California, New York or even Denver, we’re seeing rents that are increasing five or six percent a year,” Everett says.

Big picture, having some affordable housing, helps cities grow without pushing out middle- to low-income workers, such as teachers or police officers, who typically have to live far outside the cities where they work if land costs and rent premiums climb prohibitively high. This creates sprawl and burdens infrastructure and the environment. But developers don’t love the idea of potentially taking a loss on rents, and residents often have NIMBY objections or fears of property value dips. 

In some instances, though, the market is beginning to right itself with some creative reimagining of what it means to live in an affordable rental community. And the demand isn’t just coming from students.

From the on-campus side, universities are struggling to ensure their faculty can afford

UC Davis selected The Michaels Organization to develop on-campus housing that would cost less than rents off-campus.

market rents close to campus. Not being able to sustain a mortgage or rent payment in a popular neighborhood can be a detractor when colleges try to hire the best instructors for their growing academic programs. “I am working on a few projects right now where the university is requesting affordable faculty housing developments on campus,” says Everett. “I think universities are seeing affordable housing not just as a student issue but really a collegiate housing challenge for the whole market.”

Gene McDonald, principal with Harley Ellis Devereaux, has been observing the trend from the architect’s perspective for some time. He’s seen many developers who focus on affordable, or workforce, housing and developers who build student housing, but rarely a hybrid of the two groups with a consistent output of “affordable” student units.

“For the longest time, there hasn’t been a connection,” he says. “You don’t hear many student housing developers talk about the opportunity for workforce housing on campus, which I think is interesting from a P3 perspective. I think there’s opportunity in it, not just for university faculty but for a university’s actual workforce. The people who keep the campus running — how does that integrate into campus? Municipalities in Tier 1 university markets are telling us that while they know there is a demand for off-campus student housing, there are other needs for affordable, young professional and workforce housing that developers are not considering.”

McDonald forecasts the market inching toward developing hybrid products that are part purpose-built student housing and part market-rate apartments and that take design cues from on-campus residence halls. With demand for off-campus, purpose-built student housing so high, developers are singularly focused. But, McDonald notes, a gap is forming that will eventually come to the foreground. The crux of the issue is how municipalities can make these opportunities more appealing from a financial standpoint for developers.

“One of the co-living models that’s getting a lot of attention, and that is highly focused on affordability, is a product that takes the four-bedroom, four-bath configuration and turns those individual bedrooms into their own micro units that are clustered in a pod style configuration around a shared living space, says McDonald. There’s a palette out there of on-campus products, off-campus products, co-living, hospitality, and the lines are beginning to blur. The market is starting to shift on its own to deliver communities that spread costs and help people live well in expensive markets.”

Lynn Peisner. This article originally ran in the March/April 2019 issue of Student Housing Business