May 15, 2022 DST Education Series B- Asset Classification Discussion

Editor’s note- this is part three of a ten-part series on the var­i­ous asset types of DST offer­ings.

Part 3: Stu­dent Hous­ing Asset Clas­si­fi­ca­tion

By Al DiNi­co­la, AIF®
May 15, 2022
DST 1031 Spe­cial­ist
NAMCOA® – Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC

Struc­tural­ly many of the stu­dent hous­ing build­ings may resem­ble mul­ti­fam­i­ly prop­er­ties.  The Stu­dent Hous­ing clas­si­fi­ca­tion at one time was con­sid­ered part of mul­ti­fam­i­ly but because of the num­ber of offer­ings stu­dent hous­ing now com­mands its own clas­si­fi­ca­tion.

Stu­dent hous­ing, from an invest­ment point of view, has pro­vid­ed sta­ble returns espe­cial­ly in non-com­muter schools.  Stu­dents 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.

Over the years the sta­bil­i­ty of “uni­ver­si­ties & col­leges” has been not­ed as an insti­tu­tion. These pil­lars of sta­bil­i­ty pro­vide a path for many seek­ing high­er edu­ca­tion, social inter­ac­tion as well as an avenue to show­case their tal­ents as in the case of the ath­lete.  Two years ago, at the start of COVID there were many ques­tions about the impact on pri­vate stu­dent hous­ing loca­tions as col­leges were clos­ing.

The col­leges and uni­ver­si­ties were first to make a major state­ment with regards to the COVID pan­dem­ic.  One swift action tak­en was the NCAA March Mad­ness tour­na­ment to be can­celled. Like all oth­ers in the coun­try (and around the world) because of COVID we expe­ri­enced new behav­ior in all facets of our lives.

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. Not every col­lege is a prime can­di­date for a pri­vate stu­dent hous­ing prop­er­ty. (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 todays’ envi­ron­ment. There have been many prod­uct designs over the years and one plan that was pop­u­lar was 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 for the investors.  Many of the par­ents who are guar­an­tee­ing the lease for their col­lege stu­dent are backed up by one or more, six fig­ure parental incomes and a 700 plus FICO score. If there was a 100-unit com­plex you may have 300 parental guar­an­tees on the beds. Mul­ti­fam­i­ly prod­uct ref­er­ences unit count Stu­dent hous­ing ref­er­ences bed count.

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. The oth­er fac­tor may be the type of col­leges such as what is known as the Pow­er Five schools. The phys­i­cal loca­tion would also be impor­tant with des­ti­na­tion cam­pus­es rather than com­muter schools. Investors like sta­ble, con­sis­tent occu­pan­cy, tax shel­ter, appre­ci­a­tion poten­tial pro­vid­ed by stu­dent hous­ing in well select­ed col­lege loca­tions.

So, what were the impacts 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 was an inter­est­ing turn of events. 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 belong­ings.  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 were 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 offered online 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.   If you were a stu­dent hous­ing oper­a­tor and you were behind the times in pro­vid­ing band­width, etc. that was a prob­lem.  Many stu­dent hous­ing com­mu­ni­ties pro­vid­ed study areas or rooms with the increased tech­nol­o­gy and includ­ing what was advanced tech­nol­o­gy for con­fer­enc­ing (Zoom meet­ings, green screens, etc.). Zoom has now become the norm in many dai­ly activ­i­ties. What became counter intu­itive was when the school closed (or only offered class­es online) par­ents were still on the hook for the rents.

Even with remote access to class­es it was hard to replace brick and mor­tar expe­ri­ence. For schools who decide not to re-open some stu­dents trans­ferred to oth­er schools that pro­vid­ed the on-cam­pus expe­ri­ence. Most all uni­ver­si­ties and col­leges are back to nor­mal in the post COVID envi­ron­ment. We will explore the antic­i­pat­ed Fall 2022 dri­vers.

Prod­uct design changes. What COVID did dri­ve was the bed­room to bath­room par­i­ty require­ment.  Mean­ing each bed­room requires its own bath­room.  This “de-den­si­fy­ing” require­ment pushed 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 unless mod­i­fi­ca­tions can be made. 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 had a solu­tion.  The fourth bed­room may be con­vert­ed into a high-tech bed­room and bath­room.  Con­vert­ing the four bed­room two baths into three bed­rooms and three baths became the solu­tion.  Nat­u­ral­ly, spe­cif­ic per­mit­ting and local juris­dic­tion will deter­mine the process.

Cam­pus vis­its are back to nor­mal and rental lease ups for the 2022 fall semes­ters are in full swing. The out­look is encour­ag­ing.

FALL 2022 ENROLLMENT OUTLOOK: Record Appli­ca­tion Num­bers Report­ed Across US

Bol­stered by esca­lat­ing num­bers of inter­na­tion­al stu­dents, inter­est in col­lege atten­dance is high­er than ever. Soar­ing past pre-pan­dem­ic lev­els. One spon­sor believes the four-year, in-per­son expe­ri­ence is a rite of pas­sage. Some­thing both stu­dents and par­ents both see tremen­dous val­ue. With more and more US high school stu­dents pur­su­ing high­er learn­ing and even more inter­na­tion­al stu­dents seek­ing a US edu­ca­tion, many spon­sors believe this trend could lead to steady, sus­tain­able incline in col­lege enroll­ment.

• UCLA – Near­ly 150,000 appli­ca­tions (Source: UCLA news­room)
• Auburn has report­ed record 40,000 appli­cants (Source: oanow.com)
• 31% increase in inter­na­tion­al appli­ca­tions (12% domes­tic) (Source: Com­mon App Data Ana­lyt­ics)
• 21% increase in under­rep­re­sent­ed domes­tic minori­ties

DEMAND AND SUPPLY OF STUDENT HOUSING: What has changed? First of all, enroll­ment in degree-grant­i­ng insti­tu­tions in the US is pro­ject­ed to hit 19.8 mil­lion by 2025, rep­re­sent­ing a 2.6 mil­lion increase from 2017.

• New stu­dent hous­ing deliv­er­ies for 2021 reached the low­est total since 2009
• Pre-COVID vacan­cy rates of US stu­dent hous­ing remained con­sid­er­ably low between 2016 and 2019: 2016 (1.7%), 2017 (2.5%), 2018 (2.6%), and 2019 (2.3%)

Sources: Axio­met­rics and https://www.guide2research.com/research/student-housing-statistics (July 07,2020)

Tech­nol­o­gy & Secu­ri­ty– What has also changed in secu­ri­ty both inside and out­side the prop­er­ties.  For exam­ple, some offer­ings boast the lat­est tech­nol­o­gy to restrict access to only res­i­dents.  The Blue Tooth appli­ca­tions where stu­dents have access through their phones elim­i­nate the need for keys and oth­er entry sys­tems. Cam­eras are being posi­tioned in near­ly every loca­tion to mon­i­tor assess to build­ings, hall­ways, and com­mon areas.  Secu­ri­ty has become a major required ameni­ty or a demand of par­ents and stu­dents.

Final thoughts on Amer­i­can Edu­ca­tion. There has been a pre­mi­um placed on a US edu­ca­tion by for­eign stu­dents (and by for­eign par­ents). Restric­tions that were placed on for­eign stu­dents dur­ing COVID have been lift­ed. Dur­ing COVID there was a loss of rev­enue for col­leges since many of these stu­dents pay full tuition.  How­ev­er, when the for­eign stu­dents could not return dur­ing COVID this did per­mit col­leges to accept more US stu­dents.  Col­leges have demon­strat­ed they can piv­ot eas­i­ly. The pri­vate sec­tor stu­dent hous­ing devel­op­ers and spon­sors are increas­ing the attrac­tion of the prop­er­ty with enhanced designs and ameni­ties. Many of the offer­ings (struc­tural­ly and ameni­ties) rival the Class A Mul­ti­fam­i­ly prop­er­ties and if you did not know the prop­er­ty was stu­dent hous­ing you would nev­er know the dif­fer­ence.

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.

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. 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 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus. Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor. NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion).

Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 410 Peachtree Park­way Suite 4245, Cum­ming, GA 30041. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.

NAMCOA® – Naples Asset Man­age­ment Com­pa­ny®, LLC