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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2009

School's In

Demand for student housing has enabled the sector to stay strong

Fundamentals for most commercial property sectors remain at severely depressed levels. The retail and hospitality industries are suffering through historic downturns, and industrial real estate is not far behind. c_2009-10_Frink_spot

Even multifamily housing, which at first appeared to be faring better than most other property types, recently reached vacancy levels unseen in more than 20 years.

One multifamily sector remains relatively strong, however. That niche: student housing. 

In fact, in general, higher-education institutions' real estate needs remain more solid than almost any other area, except perhaps health care and government.

For commercial mortgage brokers working with student-housing properties for the first time -- or for those thinking about entering this niche -- it's wise to know more about the property type's characteristics to assess appropriate types of financing. Understanding the ins and outs of universities and other higher-education institutions will help you better determine their financing needs.

Fueled by demand

Demand appears to be the reason student housing remains a strong sector. In fact, for higher education, the recession may be a good thing.

Because of the lack of job opportunities and the fear that many people have about losing their jobs or not advancing in their careers, some people are going back to school. They often hope that by the time they are done, the job market will have improved to the point that they can find work or get a promotion.

Another factor is that we are at the height of the "echo boom." Record numbers of recent high school graduates across the country seek to attend colleges, universities and trade schools.

As a result, enrollments at post-secondary schools across the county, in many cases, appear to be growing. In addition, because the cost of commuting from home has increased, even schools that typically have more students who are older or who work full-time and don't need student housing are seeing many new students of traditional college age. And they're interested in campus life and need dormitories.

Some colleges and universities apparently were not prepared for this demand last fall. 

Some sought temporary housing alternatives for their new students, including leasing hotel rooms.

This increase in demand has been tempered by the credit crisis, however. The disruption in the financial markets -- including for student loans -- has affected how many potential students can afford to pay for their education. The funds available to public and private schools to supplement or reduce tuition and other student costs, including through scholarships and other means, also has been severely impaired.

Despite these financial setbacks, it appears that enrollments for the current school year will increase at many institutions.

Property characteristics

The net effect of the increased demand for higher education is that many schools must expand their facilities, including classrooms, faculty offices and student housing. The planning process for these properties is unlike many other real estate projects.

In developing student housing and other facilities at colleges and universities, input from different -- and often conflicting -- sources often must be considered. These include university trustees, alumni, fundraisers, faculty members and current students.

In addition, university facilities typically feature unusual configurations compared to other properties. For instance, they must have larger and more communal areas such as cafeterias, lounges, classrooms and libraries.

Student housing in particular also is unlike a typical apartment building in many ways. Shared living arrangements are the norm in dormitories, with two or more people living in the same space, often without separate rooms. More-intensive management and property inspections also are required because of the younger population.

Amenities may exceed those often found in apartment buildings, especially because the tenants are attending higher-learning institutions. Student-housing facilities are more likely to include Internet-wiring and wireless rooms and common areas. Some developments also try to distinguish themselves by providing other amenities, such as coffee shops, health clubs and maid service.

In addition, some student-housing developments are shared by more than one institution and by other users. In these cases, coordination of numerous interests is required. Separate, dedicated entrances often are required for the student-housing portions of these developments.

Finally, although location is an important factor for all property types, it is especially important for dormitories. They typically must be within walking distance of campus because of concerns regarding security, transportation and weather.

Challenges and liabilities

When it comes to developing and financing student housing and other facilities at colleges and universities, numerous challenges may arise.

First, third parties often are involved in the planning process. This usually includes students' parents and for private developments, the schools themselves. These parties often are called upon to provide additional financial assurances. 

For students and their parents, this usually includes making larger security deposits and guarantees. For privately owned student housing, schools often must have a master lease for all or a significant portion of the facilities or give the developer other financial incentives.

Because third parties also may provide some or all of the amenities in a student-housing development, developers may need to provide leases, licenses or concessions for these service-providers.

Another challenge that dormitories present that is not typical for other multifamily-housing types is that college students typically need living arrangements for only nine months of the year, unless they also attend classes in the summer. This creates problems for the student housing in achieving full occupancy year-round. There are financing programs, however, that take this into account, such as Freddie Mac's Student Housing Mortgage (, and offer nine-month leases.

Given the typical age of university students, special problems and liability concerns may exist because of security issues. Regardless of whether a college or university owns the dormitory, the institution may nonetheless be responsible for personal injuries and property damage and loss students experience in its housing facilities.

It also is not as easy for universities to evict students from a dormitory, as might be the case with a typical landlord-tenant relationship. This is because the student-tenants pay tuition at the school, sometimes through a student loan.

Financial incentives

Developers of student-housing facilities and other developments at colleges and universities may see special tax breaks. In some cases, real estate and sales-tax exemptions may be available. There also are potential tax credits for building facilities for married students.

Special configurations may be necessary for developers to qualify for the benefits, including creating subdivisions and condominium forms of ownership.

Because of the relative stability of the higher-education sector, potential investors and lenders may find student housing more attractive than other property types in today's economy, especially if the institution is eligible for tax-exempt financing. If the college or university guarantees the financing, its credit rating can impact the availability of credit. 

Although some schools have suffered significant losses to their endowment investments, they may still be attractive to investors if their creditworthiness depends more on tuition and other assets.

Because student housing remains relatively strong, many new players also have entered the industry, especially among multifamily developers. The many unusual factors in dormitory development make it more difficult than building or converting an apartment building.

Partnering with an experienced student-housing developer usually is crucial to a successful development in this field. 


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