As an estimated 16.8 million students head off to college this fall, advisors and their clients may want to consider adding Purpose-Built Student Housing (“PBSH”) to their portfolios. A subset of the multi-family sector, PBSH has seen a high level of demand from sophisticated investors, says Todd Blanding, Chief Investment Officer at Platform Ventures.
Blanding on five potential benefits of investing in the student housing sector
- Viewed as a recession-proof asset class: Student housing has performed well during economic downturns leading to less volatile cashflows than traditional rental properties. One example: During the last downturn in 2008, enrollment continued to increase as the economy was weak. This may be because people go back to school when the number of employment opportunities decrease.
- PBSH is now considered an institutionally acceptable asset class: The number of college-bound young adults, combined with the under-investment in on-campus housing by universities, has created a housing shortage for college students in many markets. During the first half of 2018, investment in student housing was led by private investors, institutions, and foreign capital, as evidenced by the chart below.
- One-year lease terms potentially benefit investors in a rising-rate environment: The industry standard term for student housing leases is one year. This means that every year rates are reset, and if interest rates are rising, the investor is not as exposed to inflationary pressures because the new rental rate is set every 12 months. This is a benefit versus other types of commercial properties, such as office and retail investments, where the lease terms tend to be several years.
- Lease renewal timing provides visibility into occupancy: Students usually renew their leases within a specific window of time well in advance of the upcoming school year and they generally know if they will be attending school the next year (or not), providing the landlord with good visibility of estimated occupancy for the next school year. This differs from traditional multi-family where a landlord generally has about 60 to 90 days of visibility into projected occupancy.
- Lease requirements and student aid provide potential for lower default risk: Most institutionally-owned student housing requires that each student provide a co-signor to the lease (likely a parent) which provides another layer of default protection for property owners. In addition, many students utilize student aid to pay for tuition and living expenses, giving the property owner a better understanding of students’ ability to pay rent.
About Platform Ventures
Platform Ventures is a holding company that, through certain subsidiaries, invests in real estate, real estate operating companies and real estate technologies. The firm has over $1.4 billion in assets under management as of December 31, 2018.