Student housing is becoming a global asset. Cross-border capital pouring into student property markets worldwide has gone up to 40% over the last three years (Knight Frank, 2019). But even with the increase in globally active capital, the private sector and institutions of higher education (IHE) are still unable to supply enough accommodations to meet student demand.
Aside from the supply shortage, developers and investors need to consider other issues like affordability and changing student preferences when constructing or renovating on-campus accommodations and student competitive housing. With these points in mind, this article aims to present emerging trends in student housing based on market demand and student preferences. We will also touch on key issues affecting the student housing market both pre- and post-COVID-19.
Demographics and the growing middle class are driving the demand for higher education, and consequently, the demand for student housing. Many campuses were not prepared when enrollment growths had resulted in huge demand for college student housing (McClure et al., 2017). By 2040, the number of students in higher education is projected to reach 594 million (Calderon, 2018). The largest share and highest volume of enrollments will be in East Asia and the Pacific.
Meanwhile, the middle class has become the largest socio-economic group in the world today (about 4 billion) and is projected to have a total population of 5.3 billion by 2030, which will represent some two-thirds of the world’s population (Kharas and Hamel, 2018). Since the middle class tends to invest more of their income in education (Kharas, 2017), we can assume the continuous expansion of higher education facilities, including the requirement for accommodations.
Source: Massification of Higher Education
The OECD forecasts that there will be about 8 million internationally mobile students by 2025, up from 5 million in 2019. The rising middle-class is fuelling demand for services and goods in all industries, including education. Two countries with a huge middle-class population–China and India–are also the top two sources of international students for the US with 369,548 students, and 202,014 students, respectively, in the academic year 2018-2019 (IIE, 2019).
Globally, there is an upward trend in the number of international student enrollment. The U.K, for example, has a 6% year-on-year increase in international student applications for 2019-2020, while Australia has seen a 118% increase in applications for a higher education visa between 2010/11 and 2016/17 (Knight Frank, 2019). In Europe, there are over 2 million international students.
Other international student destinations include Russia, Canada, Japan, Saudi Arabia, and Turkey (CBRE Research, 2018). With more universities hosting international students on top of their national enrollments, we can expect continued upward demand for student housing.
In recent years, student housing has emerged as among the most in-demand asset classes in commercial real estate worldwide (McFalls, 2019). In fact, there is too much demand for student housing, which is outstripping the supply. In the U.S., approximately 8 million students need student housing near campus (Meuller and Havsy, 2020). With an estimated 20.5 million enrollments by 2027, and with the top 175 American universities only able to house 21.5% of their undergraduates in on-campus housing (CBRE Research, 2019), significant opportunities remain for investors in student competitive housing.
However, the industry is highly fragmented–some schools are facing declining enrollment, while others are continuing to grow. Thus, there will be disparities in student housing demand based on location and demographics. Demand will continue to grow in the South and West regions of the U.S., while it will decline in the Midwest and Northeast (Meuller and Havsy, 2020).
This shortage is also a pressing concern in Europe, U.K., Australia, and India. Major European cities such as Berlin, Madrid, and Paris will have a supply gap of 100,000 beds in 2021, while the number of full-time students in the UK outweighs available beds by approximately 3:1. In India, only 20% of the current demand is met by university-operated supply, while Australia lacks available land close to universities on which to build new facilities (Knight Frank, 2019).
Housing preferences vary among individual students. Nijënstein et al (2015) argue that there are considerable disparities in the housing choice behavior of individuals. This distinctive choice behavior is typically illustrated by socio-demographic determinants like income, education, gender, and age (Jansen, 2011).
In the US, universities are pouring billions into developing student housing with luxury amenities, supposedly to attract the high rent market. However, a study from the Pew Research Center revealed that undergraduates are increasingly likely to be from families in poverty (Fry and Cilluffo, 2019). Also, the student population is income-challenged: 34% of undergraduates and 38% of graduate students earn less than $20,000 annually (Meuller and Havsy, 2020). Drawing from these data, we can imagine why more students will naturally look for affordable accommodations. With so much economic reasons pushing students to forego college, this certainly matters.
Moreover, in a survey conducted by Studenthousingbusiness.com, students placed more value on functional amenities, such as wi-fi, laundry, utilities, dishwasher, and parking over pools, fitness centers, and hot tubs. Additionally, expensive and amenity-rich housing has been identified as one factor that contributes to higher vacancy rates in newer developments (Meuller and Havsy, 2020).
The same preferences can be seen in Europe, the U.K., and Australia. Developments are moving away from traditional dorms to residences that offer functional amenities that add real value to the student experience (Knight Frank, 2019).
Aside from having the most important amenities, students are also looking for convenience. This is why “student housing is increasingly being positioned at the center of mixed-use developments” (Booty, 2019). Mixed-use developments provide a combination of residential, office, hospitality, and commercial spaces like restaurants and groceries into a single development. This can add to the sense of community and quality accommodation that most students are looking for (Knight Frank, 2019).
Another convenient aspect of mixed-use developments is the availability of affordable choices when it comes to food. In 2018, college students spent $65 billion alone on food (Lexington Law, 2020) and 34% said that it is challenging or impossible to afford food (Porter et al., 2018). Universities, as well as private owners, can be in a better position to attract tenants and reach full occupancy for their units if they are able to provide low-cost conveniences, such as groceries and food through mixed-use student housing.
Not all students who enter college are freshmen. They can be graduate students taking their masters or doctorate degrees. As of 2018, total graduate student enrollment in the U.S. was at 3 million students (NCES, 2020).
Graduate students have different life situations. They can be married with children, and some are more mature students at the doctorate level. Though current data shows that graduate students are the ones who are most likely to live off-campus–only 6% live on campus (Meuller and Havsy, 2020)–this could be due to the lack of available on-campus housing (Multifamily Insiders, 2017). The top reasons that graduate students cited on why they would like to live in on-campus housing include reasons related to transportation, access to campus resources, and financial reasons (Princeton University, 2017).
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The issues of affordability and shortage of supply can be addressed by increasing the bed capacity per housing unit. However, newer student housing in the U.S. is less likely to offer double occupancy. In fact, only 5% of student housing built since 2010 provide double occupancy (Meuller & Havsy, 2020).
Also, when it comes to bed and bath parity, both on-campus and student competitive housing have shifted to equal bed and bath numbers. For example, before 1980, 2/1 units were popular in student competitive housing units. But by 2010, 2/1 units had almost entirely disappeared and were replaced 2/2 or 1/1 units (Meuller and Havsy, 2020).
The preference for single occupancy and equal bed and bath parity can be attributed to an increasing appreciation of privacy among students. One observation is that many students grew up having their own bedrooms and bathrooms, and they would want to continue enjoying that privacy when they go to college. We do not expect room sharing to completely disappear; however, trends suggest that units that provide more privacy are becoming the residence of choice among students.
Before the COVID-19 pandemic, pre-leasing on student housing in the U.S. looked promising. In March, about 59.6% of beds were pre-leased for Fall 2020 (Bunch, 2020). Surprisingly, even after the outbreak and school closures, many student housing operators reported that more than half of their tenants remain on site. This leaves them optimistic about the fall semester (Bunch, 2020).
However, these are still highly volatile figures since many higher education institutions have announced that in-person lessons will not resume this academic year 2019-2020. Operators need to prepare for sudden changes in the leasing patterns of student housing units amid the pandemic.
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For institutions of higher education that will reopen in the fall, there will be stricter implementation of safety protocols against COVID-19. As per CDC guidelines, most student housings have closed property amenities, suspended work at on-site offices of residents, canceled special events, and began virtual tours of units, among others.
We can also expect special rules on social distancing to be followed. Universities will most probably convert their student residences to single-occupancy rooms, as opposed to historically more common double and triple occupancy (Pierce IV, 2020).
When the majority of on-campus housing is converted to single-occupancy rooms, this can result in a 20% to 50% de-densifying of the campus (Pierce IV, 2020). Students who are left without accommodations will most probably turn to nearby student competitive housing, which could then result in higher demand for this type of accommodation in the fall semester.
Student competitive housing properties that are within a half-mile from campus are pre-leased 61.9% on average and tend to outperform properties that are farther away. Properties that are within a half-mile to one mile from campus are pre-leased 53.2%, while units that are over one mile are pre-leased 52.9% on average (Bunch, 2020).
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There is an abundance of investment opportunities in today’s global student housing market. First, student housing demand will continue to rise as the world population of college-age students also increase, and middle-class families invest more of their income in pursuing higher education.
Second, there is still a huge untapped market for graduate student housing. This is attributed to universities primarily catering to the bigger undergraduate population, but we learned that many graduate students are also applying for on-campus housing.
Third, though many universities lost revenue as they had to close on-campus residences and refund room and board (Whitford, 2020), the survey tells us that operators are still optimistic. Pre-leasing for the fall semester has not gone down, which reminds us of the recession-resistant characteristics of this particular type of asset.
Finally, educational institutions, developers, and private investors need to carefully study the student demographics of each location in order to provide the most appropriate accommodations to students at an affordable price. In particular, student income and amenities should be reviewed and considered moving forward.
If you rely on financial aid, student housing should be one of your priorities. For one, off-campus housing might favor your situation, but does financial aid cover off campus housing? It’s best to verify with your granting organization before you proceed.