Bigger isn't necessarily better

Construction costs are on the rise and many “Tier I” colleges have been overbuilt in the last couple of years, making prime locations difficult to control. This causes developers to spend even more on costly amenities to try to attract students further and further away from campus. Developers also find that the rent they can charge for these larger projects are capped because these new projects are moving further away from campus centers. Bigger is therefore, often not better today, both in terms of campuses and project scope.

What is the ideal project?

Increasing, investors who are looking for attractive yields are turning to “Tier II” colleges. Many of these campuses have not had any purpose built housing developed recently, which offer the amenities today's students find appealing, such as resort-style pools, modern fitness centers, clubhouses featuring community entertainment and study areas, outdoor activity and grilling areas, as well as tanning beds.

Because of the lack of new projects and secondary market locations, developers and investors can often find available land adjacent to campus, making for a seamless extension of campus. Rents compare favorably as well and often exceed those available at “Tier I” schools due to lack of competition, attractive economic demographics of students and proximity to center campus.

Year two rent growth can frequently exceed market norms, because many of these students are not accustomed to privately developed purpose built student housing as living alternatives, therefore many may be hesitant to sign a lease in a project's first year. A successfully managed and operated property will see a substantial increase in demand in year two for this reason. For example, Stonemont Financial Group developed a project in Savannah, Georgia that has enjoyed a 6% rent growth going into its second year in Fall 2015.

“Tier I” campuses that have already enjoyed development in this cycle can provide attractive yields as well, of course, but there must be a compelling feature to the project, most likely superior proximity to campus center or high traffic areas, such as the preferred student bar/entertainment district or sports complexes. In addition to factors of level of competition and school enrollment growth, having an excellent management and marketing team onsite is critical to the ability to continue a high level of rent growth. An unhappy resident is much more apt to take to social media than a happy resident.

Ideally, a project can achieve a rent growth rate that is 0.5% to 1% above the growth of its operating expenses. The value of the investment therefore, grows over time, not accounting for uncontrollable market factors such as market cap rates.

Bed count in a project can be determined by the available land and local ordinances. However, investors should be sure that a project's bed count is appropriate for the market by doing a careful analysis to determine market demand. Weighing a variety of factors such as enrollment growth, on-campus housing availability, demographics to support pro forma rents as well as the ability for students to live off campus (many colleges require freshmen/sophomores to live in dorms), will give investors the insight they need.