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Where Should You Invest in Student Housing in 2020?


[Updated: Jul 30, 2020] Feb 17, 2020 by Matthew DiLallo
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Privately-owned student housing has grown from a niche market to a bustling investment subclass for real estate investors over the past couple of decades. It currently represents between 7% and 12% of the total U.S. rental housing market, according to a recent report by the National Multifamily Housing Council's (NMHC) Research Foundation.

That report offers compelling data for real estate investors by shining a light on several ways to earn outsized returns on student housing-related opportunities.

Two top regions for student housing

The NMHC Research Foundation's report on the U.S. student housing market outlined several key opportunities for investors. Topping the list was focusing on high growth markets where demand is outpacing supply. It noted that "some schools are already facing closures and declining enrollment."

Two regions where that's increasingly the case are in the Midwest and the Northeast because they have lower economic growth and aging populations with less in-migration. As a result, the demand for student housing in those regions is flat-to-declining.

The report noted that many schools in the South and West, on the other hand, "continue to grow, even in excess of new supply" of student housing. The South, for example, has a "demographically diverse population base supported by a younger population that generates births as well as in-migration" due to factors like a lower cost of living and milder winters. Meanwhile, many colleges and universities in the West, especially in California, Texas, and Arizona, are growing enrollment at a faster pace than those in the Northeast and Midwest.

The report highlighted several schools where enrollment is growing faster than new student housing supply, causing a significant shortfall, led by:

School Housing Shortfall
University of Texas at Arlington More than 10,000 units
University of Texas - Rio Grande - Edinburg Roughly 8,000 units
Rutgers - New Brunswick About 7,500 units
Oregon State Around 7,000 units
University of Central Florida Around 7,000 units
University of Southern California About 6,500 units
Texas A&M - Kingsville Around 6,000 units
Florida International Around 6,000 units
Arizona State Nearly 5,000 units
University of California - Davis Around 4,000 units

Data source: NMHC Research Foundation.

It's worth noting that only one of those schools -- Rutgers - New Brunswick -- wasn't in either the South or the West.

One real estate company that has aligned itself with the trends in student housing is American Campus Communities (NYSE: ACC). The primary focus of the residential real estate investment trust (REIT) is to own student housing near schools that draw students due to athletics (e.g., Power Five conferences) or research (e.g., Carnegie R1 institutions) because they tend to enjoy steady enrollment growth. Because of that, American Campus Communities is benefitting from operating student housing properties near several supply-constrained schools, including Arizona State, which was the largest contributor to its net operating income at 9% over the past year.

Mixing things up a bit

Another opportunity highlighted in the NMHC report was that students also want access to low-cost convenience items like chain food providers and grocery stores. That's because food is often their third-highest monthly cost after tuition and room expenses. This factor leads the NMHC report to recommend investors consider mixed-use high-rise properties that lease space to students as well as their food favorites like Subway, Chick-fil-A, Starbucks (NASDAQ: SBUX), Panda Express, and Chipotle (NYSE: CMG).

Real estate investors could also consider focusing on retail properties leased to tenants like those near campuses with high enrollment. For example, BRIX REIT, which is a public non-traded REIT, targets owning real estate focused on meeting the needs of younger generations. Its strategy is to acquire student housing and rental apartments as well as real estate leased to quick-service restaurants, casual dining concepts, convenience stores, and fitness centers.

Many opportunities for investors

The NMHC Research Foundation wants real estate investors to earn outsized returns, which is why it put together a report on student housing that could help them make better-informed investment decisions. They see several opportunities, including investing in regions where enrollment is growing faster than supply and mixed-use properties that cater to students' need for affordable food options. Investors who use this data to shape their investment decisions should enhance their ability to earn attractive returns while also avoiding areas where returns could disappoint.

(Disclosure: the author owns shares of BRIX REIT)

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Matthew DiLallo owns shares of Chipotle Mexican Grill and Starbucks. The Motley Fool owns shares of and recommends American Campus Communities, Chipotle Mexican Grill, and Starbucks. The Motley Fool has a disclosure policy.