Today, the American economy is in an unpredictable state. No one knows exactly where it will lead. Rising interest rates and inflation are causing a variety of personal financial decisions, including scrutiny of how and where to invest. Historically, real estate has been one of the safest investments. Real estate investing is safe and protected by property, and rarely will the investment lose value, and if so, it is usually short term.
There is 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 type of property is compelling because the stock market is unpredictable, interest rates are unpredictable, office spaces are unpredictable, etc., but student housing is largely predictable with long-term appeal. In short, there is no wrong time to start investing.
There are a few reasons why investing in student housing property is recession-proof. One reason is that it has little to do with the economy as a whole. Because the demand for student housing is primarily based on age, it doesn’t matter whether the economy is booming or going through a recession.
It was proven throughout the Great Recession of 2007-08 that student housing went up as people went to complete their degrees to maintain a competitive edge. This area is a great place to invest even in a recession as more people go to school to complete their degrees or gain new skills and stay more competitive in the job market. According to the National Center for Education Statistics (NCES), US enrollment in post-secondary education grew 4.7 percent in 2008 and 6.3 percent in 2009, the highest growth since at least 1981. At the same time, demand increased, and the performance industry grew.
Overall, the student housing industry is largely recession-proof due to deferred years, and demand is more important than ever. In addition, many institutions limit the total number of new students they are allowed to enroll in the school, which further increases the demand. In reality, there are not enough universities for students, so there will always be a demand.
One reason student housing is less correlated with the overall economy is because students attend schools and universities for graduate standing and personal advancement, not specifically because of the economy.
For example, people don’t buy single-family homes based on age. They buy based on whether they can afford them, how the economy is doing, and if they have a good and stable job. By comparison, college students go to college after graduating high school, so the student housing supply is very predictable.
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Consider it. Each university is its own micro-economy, and micro markets and housing dedicated to the student population vary from city to city. For example, in the state of Utah, there is a minimum housing supply because the university is surrounded by significant mountain ranges and a huge canyon that comes down on one side, so a small area of student housing is zoned. While Texas A&M is a large school with an endless amount of land, there are many construction opportunities. The top indicator of success is located in student housing.
Most student housing facilities were also built in the early 70s and 80s. Because the location was so remarkable and important, they were able to keep them complete without paying any money. Once an older facility is updated with modern appliances, new countertops, new carpet, amenities, etc., the door opens for rent to increase, sometimes $100 or more per bedroom. So, it creates value. This creates upside in the value of the property, which increases rents, 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 two bedrooms and two bathrooms per unit. In the 70s, these rooms were designed as shared rooms with two people in each room. This essentially made the kitchen, family room, and open area too big for two people because it was designed for four people. Adding a third bedroom, by reconfiguring the family room in half, which is still enough room for three students, creates an additional $600 per month in our 50 units. So, if you do the math, this is a huge return on investment for proper upgrades to the property.
For investors who want to continue to grow or diversify their portfolios during stressful economic times, investing in real estate should continue to provide safe long-term returns, especially within the student housing sector.
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 university campuses nationally.