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Because the size of the tenant base is fixed and is enrollment and supply dependent, properties compete against each other to lease units in the same period. Fully occupied assets that prelease poorly can suffer drastic occupancy drops after the leases turn over. After all student tenants are spoken for, a property often must contend with vacancy for a full year.
• By-the-bed rental: Most institutionally managed student housing is leased by the bed (e.g., each tenant in a four-bedroom apartment has a separate lease). The by-the-bed model allows managers to earn a rent premium on a square-foot basis because of density. Although some managers continue to lease on a per-unit basis, it is uncommon and often reserved for properties that cater to graduate and professional students.
• Summer occupancy: Most properties’ physical occupancy declines dramatically in the summer months, although economy occupancy should not be affected. Lenders often are concerned about properties that lease for periods less than 12 months because of cash-flow concerns. Students on 12-month leases understand their obligation to pay their rent in the summer regardless of whether they continue to reside at the property, however.
• Expenses: Student-housing properties are more operationally intensive than conventional multifamily assets and thus generally have a higher expense ratio. To provide tenants with added convenience and to simplify rental rates, many managers include utilities and furniture in the base rent. It is important that the assigned appraiser has in-depth student-housing experience and knowledge of customary expense ratios nationwide.
• Cap rates: Cap rates should be applied only to like-kind student-housing assets. In smaller secondary and tertiary markets, appraisers and originators should use cap rates from similar properties in similar student-housing markets nationwide. The spread between cap rates for student and conventional assets in the same market can be astounding. In fact, it is said that student housing trades at a 100-basis-point discount to conventional multifamily assets.
• Parental guarantees: Experienced managers typically require that tenants’ parents guarantee rent payment. Given student tenants’ limited credit history, it is otherwise difficult to mitigate collection loss. Industrywide, collection loss is thought to be less than 2 percent on average.
• Damage: Contrary to widespread misconception, most student tenants treat their apartments with care. The use of parental guarantees, frequent damage inspections and renters’ insurance helps mitigate against potential physical- unit damage.
• Amenities: Student housing is currently facing an amenity war. New developments often feature the latest and greatest amenities to attract the fickle student population. This has forced owners to consider product and rental-rate positioning more carefully.
• Bedroom-bathroom parity: Industry consensus dictates that each bedroom should have a private bathroom. In this market, properties with older-style shared bathrooms will be forced to price at a discount compared to their newer competitors.
Understanding the student-housing product and its issues is critical to closing new loans. Brokers can increase their business and their market presence by gaining knowledge and experience in this valuable niche.
Oliver Swan is managing partner and co-founder of Treesdale Real Estate Partners LLC, a student-housing-focused investment company, where he sits on the investment and executive committees.
Prior to co-founding Treesdale Real Estate Partners, Swan served as the chief investment officer of a New York-based student-housing owner/operator. He has a bachelor’s degree in finance from New York University’s Stern School of Business. Reach him at (212) 299-5529 or email@example.com.
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