Today, the U.S. economy is in a state of unpredictability. Nobody knows precisely where it’s going. Rising interest rates and inflation are causing various personal financial decisions, including scrutiny on how and where to invest. Historically, real estate has been one of the safest investments. Real estate investing is safe and secured by the asset itself, and rarely will the investment lose value, and if so, it’s usually short-term.
There is a significant demand for student housing due to the years of deferral, especially among international students.
Student housing is one of the most predictable industries, so investing in this sector is an excellent 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 spaces are unpredictable, etc., but student housing is largely predictable with long-term appeal. In short, there is no wrong time to begin investing.
There are a few reasons why investing in student housing property is recession-proof. One reason is it is very lowly correlated with the overall economy. Because the student housing demand is predominately based on age, it doesn’t matter if the economy is booming or going through a recession.
It’s been proven throughout the Great Recession of 2007-08 that student housing boomed as people went back to finish their degrees to maintain a competitive edge. The sector tends to be a great place to invest even in a recession because more people go back to school to finish their degrees or acquire new skills to stay more competitive in the job market. According to the National Center for Education Statistics (NCES), U.S. enrollment in post-secondary education grew by 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 of the industry rose.
Overall, the student housing industry is mainly recession-proof due to the years of deferral, and demand is more significant than ever. Additionally, many institutions limit the total number of new students they are allowed to admit to the school, making the demand even higher. Realistically, there aren’t enough universities for students, so there will always be a demand.
One of the reasons student housings tend to be lowly correlated 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 if they can afford them, how the economy is doing, and if they have a good and stable job. In comparison, college students go to college once they graduate high school, so the student housing supply is very predictable.
Consider this. Every university is its micro-economy, and micro market and housing dedicated to the student population vary from city to city. For example, at Utah State, there is a minimal housing supply because the university is surrounded by significant mountain ranges and an immense canyon that comes down on one side, so a small area of student housing is zoned. Whereas Texas A&M is a big school with endless amounts of land, there are many building opportunities. The top indicator of success in student housing is located.
Most student housing facilities were also built in the early 70s and 80s. Because the location was so notable and crucial, they have been able to keep them full without putting any money into them. Once an older facility is updated with modern appliances, new countertops, new carpet, amenities, etc., the door opens to increase rent, sometimes $100 or more per bedroom. So, this creates value. It creates an upside in the property’s value, which increases the rent, the 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, which mean it had two bedrooms and two baths per unit. In the 70s, these rooms were designed to be shared rooms with two people in each room. This essentially made the kitchen, the family room, and the open area way too big for two people because it was designed for four people. Adding in a third bedroom, by reconfiguring the family room in half, which is still plenty enough room for three students, creates an additional $600 a month in 50 of our units. So, if you do the math, it’s an enormous return on investment for reasonable upgrades to the property.
For investors wanting to continue growing or diversifying their portfolios, even during strained economic times, investing in real estate should continue to harbor safe long-term returns, especially within the student housing segment.
Patrick Nelson is the CEO of Nelson Partners Student Housing. Based in San Clemente, Calif., Nelson is a real estate investor and developer operating 18 student housing properties at university campuses nationally.
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