Student Housing Insight

By Al DiNi­co­la

DST.Investments, LLC

Secu­ri­ties offered through MSC-BD, LLC

July 23, 2020

The col­leges and uni­ver­si­ties were first to make a major state­ment with regards to the COVID pan­dem­ic.  Many across the coun­try could not believe the NCAA March Mad­ness tour­na­ment would be can­celled. Like all oth­ers in the coun­try (and around the world) we have enter­ing new ter­ri­to­ry in all facets of our lives.

Over the years the sta­bil­i­ty of “uni­ver­si­ties” has been not­ed as an insti­tu­tion. These pil­lars of sta­bil­i­ty pro­vide a path for many seek­ing high­er edu­ca­tion, social inter­ac­tion as well as avenue to show­case their tal­ents as in the case of the ath­lete. COVID’s impact on col­lege sports will be the in future dis­cus­sions.

Stu­dent hous­ing, from an invest­ment point of view, has pro­vid­ed sta­ble returns espe­cial­ly in non-com­muter schools.  Stu­dent need a place to live as well as keep the belong­ings they have moved out of their par­ents’ home. That is the big pic­ture. Many advis­ers are bull­ish on stu­dent hous­ing with sus­tain­able occu­pan­cy.  The amount of stu­dent debt being tak­en on is anoth­er top­ic but suf­fice to say there is lend­ing avail­able for many stu­dents to go to school.

What were the out­looks pri­or to COVID? The stu­dent hous­ing sec­tor has been one of the strongest invest­ment sec­tors and there has been insti­tu­tion­al mon­ey deployed in this sec­tor. The DSTs that have been struc­tured in spe­cif­ic loca­tions have done well over the years. (Many investors have uti­lized a 1031 tax deferred exchange with a DST as a replace­ment prop­er­ty). Dur­ing reces­sions col­leges and uni­ver­si­ties have seen an uptick in enroll­ment as peo­ple seek to obtain new skills.

Stu­dent hous­ing has changed from the per­spec­tive of Ani­mal House (the movie) to today’s’ envi­ron­ment. There have been many prod­uct designs over the years and one plan may be a four-bed­room unit with two bath­rooms that would accom­mo­date four stu­dents. This was a big step up from old­er cam­pus hous­ing with the bath­room at the end of the hall.  From a lease struc­ture there are four leas­es with each indi­vid­ual stu­dent. Par­ents of the stu­dents would be required to sign on the lease (thus guar­an­tee­ing the lease or guar­an­tee­ing the bed lease).  This han­dles the poten­tial evic­tion of one per­son or the exit of one stu­dent. When con­trast­ing the parental guar­an­tee vs. a typ­i­cal mul­ti­fam­i­ly rental there may be added com­fort lev­el form the investors.  Many of the par­ents who are guar­an­tee­ing the lease for their col­lege stu­dent are backed up by six fig­ure incomes and a 700 plus FICO score. If there was a 100-unit com­plex you may have 300 parental guar­an­tees on the beds.

In many uni­ver­si­ties the fresh­men are required to live on cam­pus in the dorms. First year of col­lege is where most of the fall out or drop out occurs. (One of the big met­rics col­leges and uni­ver­si­ties use is the grad­u­a­tion rate of fresh­men).  When stu­dents spend their fresh­men year on cam­pus there is a high­er grad­u­a­tion rate). Stu­dent hous­ing num­bers will rise with increased enroll­ment but the increase with rentals will lag a year or so as the fresh­man move out of the dorms. The stu­dent hous­ing mar­kets have matured. Nat­u­ral­ly, the loca­tions with­in walk­ing dis­tance to cam­pus is a plus along with the Pow­er Five schools and tra­di­tion­al non com­muter schools. Investors like sta­ble, con­sis­tent occu­pan­cy, tax shel­ter, appre­ci­a­tion, demand for uni­ver­si­ty in non-com­muter schools

So what was the impact from the COVID clos­ings on stu­dent hous­ing.  The ini­tial reac­tion by many was stu­dent hous­ing would be in the same posi­tion as hos­pi­tal­i­ty with plung­ing occu­pan­cies. There has been an inter­est­ing sit­u­a­tion occur. The fresh­men who were in the dorms were told to leave. While many may have gone home, they were faced with the chal­lenge of what to do with their belong­ing.  Sev­er­al self-stor­age facil­i­ties saw an increase in rentals.  Return­ing to their par­ents’ home was not an option for many and as a result there was an uptick in addi­tion­al rentals in pri­vate stu­dent hous­ing which was not forced to close. In addi­tion, many stu­dents did not want to go home. If the stu­dents did go home, they want­ed to return to col­lege (or at least their off-cam­pus apart­ment home). Col­leges con­tin­ued to offer on live class­es to fin­ish the semes­ter. The pri­vate sec­tor stu­dent hous­ing man­age­ment com­pa­nies who were quick to respond with dig­i­tal move in, face book page updates as well as increased band­width for WIFI did remark­ably well. Man­age­ment com­pa­nies with oper­at­ing strat­e­gy for dig­i­tal needs did very well.  If you are a stu­dent hous­ing oper­a­tor and you are behind the times in pro­vid­ing band­width, etc. that is a prob­lem.  Many rooms have study areas or rooms with the tech­nol­o­gy and some with advanced tech­nol­o­gy for con­fer­enc­ing (Zoom meet­ings, green screens, etc.) in the rooms.

What is counter intu­itive is the school clos­ings (or only online) but par­ents are on the hook for the rents.

Even with remote access to class­es it is hard to replace brick and mor­tar expe­ri­ence. For some schools who decide not to re-open there may be stu­dents trans­fer­ring to oth­er school who pro­vide the on cam­pus expe­ri­ence. As schools decide on reopen­ing (and a large major­i­ty are scram­bling to do so) what has hap­pened to the stu­dent liv­ing sit­u­a­tion?  Many col­leges have insti­tut­ed bed­room to bath­room par­i­ty.  Mean­ing each bed­room requires their own bath­room.  This “de-den­si­fy­ing” require­ment will push stu­dents out of the dorms. Dor­mi­to­ries with four stu­dents shar­ing two bath­rooms will be reduced to two stu­dents (in a four-bed­room unit) shar­ing the 2 bath­rooms. In the old­er style dorms this will be even more of a chal­lenge. The fresh­men will need to seek off cam­pus hous­ing and add to the demand of pri­vate stu­dent hous­ing.  The pri­vate sec­tor may be at an advan­tage with the unit mix.  Many one-bed­room/one bath­room units as well as two-bed­room/t­wo bath­room units will not be affect­ed by the par­i­ty require­ments. In the larg­er four-bed­room units that only had two bath­rooms, the pri­vate sec­tor many have a solu­tion.  The third and fourth bed­room may be con­vert­ed into a high-tech bed­room and bath­room.  Con­vert­ing into three bed­rooms and three baths.  Nat­u­ral­ly, spe­cif­ic per­mit­ting and local juris­dic­tion will deter­mine the process.

Cam­pus vis­its were stopped by April so the lease up may not have been com­plet­ed. There may also be a scram­ble for space as schools set to open.  Online walk through of loca­tions and rooms con­tin­ue as well as online leas­ing.

There has been a pre­mi­um placed on a US edu­ca­tion by for­eign stu­dents (and by for­eign par­ents). Restric­tion on for­eign stu­dents return­ing will cre­ate loss of rev­enue for col­leges since many of these stu­dents pay full tuition.  How­ev­er, this may per­mit col­leges to accept more US stu­dents.  Col­leges can piv­ot eas­i­ly. It appears that the col­leges will have test­ing upon arrival and the fall term for on cam­pus will end Thanks­giv­ing with online class­es for the bal­ance of the term.  Then all stu­dents will be test­ed again when return­ing for the spring term.

The big ques­tion may be what hap­pens if schools open and there is no col­lege foot­ball. Col­lege foot­ball is one of the biggest divers of the econ­o­my. Small­er col­leges may not be affect­ed as much as the larg­er schools.

As we move into August, we will mon­i­tor all DST assets offered by Spon­sors espe­cial­ly in the Mul­ti Fam­i­ly space which makes up 53% of cur­rent DST Spon­sor offer­ings.  Stu­dent hous­ing offers anoth­er 11% of offer­ings.

Con­tent for this arti­cle was obtained through com­mu­ni­ca­tions with DST spon­sors of Stu­dent Hous­ing. Not all Stu­dent Hous­ing loca­tions are the same and may have dif­fer­ent results. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future.

For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098.