Student housing is a multibillion industry that is growing, but it also is an asset class that is facing shortages and a crisis in quality. Traditional college dormitories and off-campus housing are simply inadequate for meeting the needs of today’s nearly 20 million U.S. college students. But there is an emerging solution in co-living apartments.
Co-living has become a popular lifestyle choice for working professionals in expensive major metros, such as New York City and Los Angeles, but it’s not only for young urbanites. The model just happens to be a perfect fit for supplying an affordable and better place to live for students all over the country.
Co-living is a relatively new term in commercial real estate that refers to a living arrangement where, typically, five or more adults share space in a portion of an apartment building. Normally, a person rents a private room with many of the same amenities as an apartment but shares certain common areas with others. These complexes are professionally managed and maintained.
This model has tremendous potential for growth outside of big cities, where co-living has already taken off as a niche sector of multifamily housing. Student-housing is an especially good fit for the co-living model given the large size of the U.S. student population and the demand for better housing options near college campuses.
Commercial mortgage brokers should be watching this sector. Investors need financing to do ground-up construction projects or acquire older buildings that may be suitable for conversions. The co-living model has the potential for a much higher return-on-investment ratio by yielding more rentable rooms at a less expensive per-room construction cost than a traditional apartment building.
Investor appeal
Multifamily investors will be naturally drawn to investments in co-living properties because the per-bed construction costs are substantially lower than that of a traditional apartment building. Design company Arco Murray, for example, compared the costs of creating a pair of 10-story, 138,000-square-foot buildings in Chicago using both models. The overall construction costs were 6% higher to build a co-living complex, but the per-room cost was 50% lower.
The key difference was that the co-living layout significantly increased the density of residential space. According to Arco Murray’s modeling examples, the traditional one- and two-bedroom apartment building supported only 135 beds, whereas a co-living building accommodated up to 288 beds. The per-room construction cost of the co-living apartment complex ($124,000) was less than half that of a traditional apartment ($250,000).
This student-housing market also has the potential to grow across the country. According to Statista, there were about 19.6 million U.S. college students in 2019. Some 14.5 million students attended public schools and 5.1 million were at private schools. The total number of college students is projected to grow to 20.1 million by 2029, creating a massive demand for housing.
Another factor that is bound to attract investors is that competition is inadequate. Today’s students want something more than to rent a bed in the basement of an old house or a studio apartment in a sketchy neighborhood. Other traditional housing options for students, such as dorms and off-campus apartments, can be unappealing for several reasons.
On-campus option
Dorms are typically the first choice of first-year students, who are often away from home for the first time, new to the area and want to get to know the campus. Student dorms, however, have a number of potential problems. Privacy is one. Normally, each room is shared by up to four students of the same gender.
Many schools also randomly assign students to rooms, which can cause personality clashes and conflicts over different living habits. Schools also may impose strict rules, which are necessary to ensure safety but can prove to be inconvenient and unsuitable for mature students who would prefer more freedom.
Dorms also vary widely in quality. Resident halls tend to be old and lack updated facilities. Additionally, they usually lack an in-unit laundry room. Students have to share the laundry with the entire floor. Students who live in dormitories also are normally required to purchase meal plans. The total cost for the entire school year can be expensive and the quality of food offered by school cafeterias is inconsistent.
Colleges often have a limited supply of rooms available to students, so even first-year students are forced to look off campus for living space. Yet off-campus housing options can be equally unappealing.
Student housing is an especially good fit for the co-living model given the large size of the U.S. student population and the demand for better housing options near college campuses.
Off-campus choices
Renting a room in a house is one of the cheaper off-campus options that provides an alternative for students who don’t want to live on campus but don’t have enough of a budget to live alone. But there are a number of disadvantages with this arrangement.
As with dorm rooms, there is a lack of privacy. The student will almost always have to share a kitchen, living room and bathroom with other people. Second, renting a house with others can cause disputes over living habits, shared cleaning duties and financial responsibilities. The leasing terms, for example, can be a source of conflict, particularly if one or more of the roommates fails to pay the rent on time.
Also, the student is typically renting a room directly from the owner. Typically, there won’t be a professional manager to ensure the property is maintained and that broken appliances, furnaces or leaky pipes are fixed promptly. The landlord may choose not to renew the contract or may raise the rent due to various reasons. In some cases, students are forced to hunt for a new place to stay midway through the semester.
Private rooms and homes for rent also tend to be unfurnished, forcing cash-strapped students to find couches, chairs and tables when and where they can. Also, students often must sign the lease and move in sight unseen. Any pictures posted on the listing website might differ from the actual rooms and many landlords won’t reveal hidden problems in the house.
Another popular off-campus option is a traditional apartment complex. Many apartment buildings have amenities, such as a gym, lounge, pool or rooftop. But these properties tend to be on the luxurious side and are unaffordable to most students. If the student shares the apartment with roommates, many of the same problems crop up regarding privacy, personality conflicts and competing lifestyles.
Co-living advantage
The co-living model can solve a number of these problems. Although co-living designs and layouts can differ, the student usually has a private room with its own bathroom. The typical co-living apartment building includes a modern furnished living area and kitchen. There is usually an in-unit laundry along with space to study, hang out and watch television.
Another feature that co-living fosters is a sense of community. In co-living units, the student is likely to meet like-minded people but without as much risk of conflict over bill payments and house rules. Remember that these facilities are professionally managed. The lease agreement is with a single tenant, so the student is only responsible for paying their share of the rent and doesn’t have to worry if other tenants fail to pay.
In summary, the co-living model provides the best aspects of dormitories and apartments. By offering affordable, private bedrooms in a fully furnished unit and implementing systematic management service, much of the co-living space in today’s market provides students with a better living experience in an ideal location at a lower cost. In addition, co-living apartments usually offer a safe and well-equipped social space for tenants to hang out with their friends.
The popularity of co-living is driven by an ongoing need for systematic management and the desire to have better-quality living arrangements. The ability to minimize the hassles involved in moving and renting while providing affordable, standardized living communities will be appealing to students and recent college graduates. For developers, investors and the mortgage brokers who do business with them, the high demand and optimal return on investment for these properties illustrate their promising future. ●
