The Emergence Of A New Asset Class – The Student Housing Industry: Part 1

by Katie Sloan

Before the mid-1990s, only a few students (usually upperclassmen) would leave campus dorms and frats in pursuit of the freedom that apartments and rental houses bring.

Before the mid-1990s, only a few students (usually upperclassmen) would leave campus dorms and frats in pursuit of the freedom and independence that conventional apartments and rental houses would bring them. Most of the off-campus housing was poorly kept and managed by small, unsophisticated local mom-and-pop landlords who were happy to rent to anyone who would move into their investment property and pay them rent. This often happened to the dismay of the surrounding neighborhood communities because students generally had different lifestyles (hours of sleep, music preferences, noise tolerance, social preferences, etc.) than the working families in the neighborhoods or apartments. Many landlords refused to rent to students because they were afraid that the students would damage the property, not pay their rent, and then leave them vacant through the summers.

Two powerful trends surfaced in the mid ‘90s that significantly changed the off-campus housing opportunity. First, university enrollments increased faster than their on-campus housing supply. RREEF and the National Center for Education Statistics have estimated that dorm capacity fell from 32.2% of total enrollment in 1990 to 24.8% in 2004. It seems likely this trend will continue due to increasing enrollments in the face of budgetary constraints which limit the supply of available on-campus housing.

Second, the new residents (echo boomers) were very attached to their parents and more responsible and environmentally conscientious than their predecessors. They also regarded college as a year-round activity.

These two trends produced a high demand for off-campus student housing from a high quality resident (leases were co-signed by parents and guaranteed for 12-month terms). These drivers caused the advent of purpose-built and purpose-managed off-campus student housing. Student housing did not become a distinct asset class until the late 1990s when national apartment developers began to enter the market differentiating themselves from conventional apartments by offering private bathrooms with each bedroom, high-speed direct-connect Internet, and student-based amenities such as resort-style swimming pools, activity rooms, gyms, extra parking, and shuttles to the university. These national apartment developers soon learned that physical differences alone do not assure success in the student housing industry. Once a purpose-built student housing apartment was built, the greatest challenge lay ahead. There was a world of difference between managing a student housing apartment and a conventional apartment.

Managing student apartments is a specialty niche that requires a level of management intensity and expertise that is an order of magnitude greater than standard conventional property management. Your staff needs to have “the right stuff”. Your marketing needs to be intense, intimate, dynamic, and highly creative.  You have to provide an incredibly high level of customer service similar to hotel chains (like the Ritz-Carlton) for student residents, as well as their parents. Your operating and maintenance processes and procedures need to be best in class or it will show up quickly since 70% of your customers move out every year and you are required to reinvent yourself every 4 years with each new college generation.

The student apartment industry has seen enormous growth over the past decade.  Although an estimated 85% of off-campus student beds are still owned and managed by local, non-institutional investors, we are seeing a number of national players and conventional money enter this segment. The industry now contains two publicly-traded real estate investment trusts (ACC and EDR) and has attracted institutional capital on both the debt and equity sides.  While the industry has seen a massive influx of new operators and owners, we do believe there will be a significant amount of consolidation in the years to come as the stronger operators absorb the weaker.

Part 1 of this article, appearing here, gives the reader a taste of the differences between student housing apartment management and conventional apartment management as it pertains to the living environment and staffing. Part 2, appearing consecutively on, will focus on the differences in marketing, operations and financial performance of student housing properties.

The Main Difference – Students are not Working Families

The main difference between conventional and student housing is that the target market for student housing apartments is college students and not working families. Successful conventional apartments are full year around and are able to replace their attrition through waiting lists and ongoing advertisements in newspapers, apartment finder, web, etc. The prospective resident calls in and signs a lease. If the price, location, and product meet their needs, they move in within a month. The student housing lease up is not so simple. The student (usually a freshman or sophomore who is living on dorm) usually gets the message from his friends who convince him that they should live off campus next year for the freedoms and amenities that it provides.

This begins the search (often 8 months before move in). Amenities, floor plans, pricing, etc. are important, but the most important thing is that they live with their friends. Echo Boomers are very group oriented. Once the decision has been made (to all live in this cool place with their friends) all they have to do is convince their parents. Parents can be sold on this idea if the price is no more than the dorms, the place appears to be safe, and that there is easy access to campus (through shuttles or location). The resort-style clubhouse, pool, and gym generally excite the baby boomer parents (who are living vicariously through their son or daughter) as they explain, “We never had it like this when we were in school. These kids have it made don’t they?” Echo Boomer’s helicopter parents are proud of their sons and daughters for their academic success and want them to have the best college experience and environment.

The Living Environment – a cross between camp and the Ritz-Carlton

Students want to be close to the university so location is very important. If the apartment is not within walking or biking distance of the university, it will need to have transportation or a shuttle to the university. Their parents, who we require to co-sign, want Individual leases (i.e. leases by the bed) so they are only responsible for their own son or daughter. Students want a bedroom with a private bath and they want a parking place for their car. An important part of college is connecting with lots of people and making lots of friends. The gym and tanning beds get used heavily. Staying in good shape and maintaining their tan are often priorities for students. These amenities must be available 24/7 since most students are nocturnal.
Also, our student residents want to have lots of opportunities to meet and connect. This is why it is important to have barbecue grills at every building as well as basketball courts, sand volleyball, swimming pools with hot tubs, clubhouses with big screen TVs (like a sports bar), pool tables, ping pong and “beverage pong” tables, and a staff that encourages a “camp or fraternity/sorority atmosphere” along with weekly social events like trivia contests, 3-on-3 basketball, pool tourneys, beverage pong tourneys, Texas Hold’em, etc.  The facilities at a student housing apartment are heavily used, unlike most conventional apartments where amenities like the gym are mostly just for show and attracting professionals who will end up working out with a trainer at Gold’s Gym instead of the mostly vacant workout room in the apartment complex.

The clubhouse is like a five-star hotel concierge floor serving hot cookies, healthy fruits, and Starbucks-type coffee at no charge as well as a staff  that is happy to advise, council, or just listen to them (and even their parents when they call to see how their daughter is doing).  The computer lab is like a hotel business center with copier and printers for term papers. The result is that residents form relationships and a community that will sustain its membership much like a fraternity or sorority. The current residents bring new residents into the community and the community thrives with renewals and referrals.

The Staff – Specialists not General Practitioners

This environment requires that you have an operational staff that is more like camp counselors. They know all the residents’ names, as well as personal details, and many of the parents and friends. They need to have a special blend of personality strengths. It is important that they are friendly, collegial, energetic, adaptable, good listeners, caring, and trustworthy. They must also be good roll models, mentors and coaches. In short, they must be leaders in the student resident community and not just apartment management employees. This applies to all of the staff (managers, leasing agents, operations people, maintenance, and part-time student help). They must all take ownership of the residents’ happiness and environment. They perform roommate matching, counseling, and conflict resolution. Social events like Halloween costume parties, luaus, back-to-school parties, trivia night, football game night can last until midnight and a successful staff will get involved in the event. Working at the site is not a job where you clock in and out, it is a lifestyle and it is all consuming. Everyone on staff is constantly making sure everything is clean and trash free. They are constantly interested in the residents — asking them how they are doing and if they are happy.

For success in the student housing business, the staff needs to be higher paid, higher educated, managed by objectives, and more entrepreneurial than standard conventional property management staff. The staff also needs to include current residents and students as part-time help because it keeps their finger on the pulse of the ever-changing student community needs. In short, the staff is a high-performing team of dedicated student housing specialists, not just general practitioners.

Click here for part 2 of this article.

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