One bright spot in the troubled real estate market is student housing. Demand for it is high, particularly in markets with more affordable state universities and colleges.
In fact, the demand for privately financed student housing is not just holding even, it is getting stronger, driven by two sources:
Every hour since the year 2000, about 702 echo boomers have been reaching college age.
More adults have been opting out of depressed job markets and retraining for new careers. "More new students are in their thirties, forties and fifties. The profiles of the older students are often former small-business owners or employees of other downsized businesses looking to change careers. They won't take the traditional two-to-a-bedroom college dorm, and they don't want the animal house three-decker shared with a household of major Budweiser consumers," according to one student housing manager.
The real estate crisis began with the implosion of single-family home mortgages. Then single-family home prices collapsed, and now the problems have spread to commercial real estate markets around the country. For example, office vacancies in high-tech driven Orange County, Calif., were 7% quite recently; they are over 18% today and climbing. Chicago office vacancy has held pretty steady at 10% for some years, but Jones Lang LaSalle, a global commercial real estate firm, believes it could hit 19% in 2009.
Retail sales (excluding autos) were down 3.1% in December, and much of that hit department stores and smaller chain stores that drive retail malls and retail-mall REITs. In Texas, according to The New York Times, "Houston, like Dallas, held up while many other cities were showing the strains of an economic slowdown. But job growth and the brisk business of oil and gas exploration have come to an abrupt halt. Vacant or unfinished shopping centers dot the highways. Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80% has not been leased. As a result, the vacancy rate is 11% and rising."
But student housing is holding up, and even thriving, especially in markets that have state schools. That's because many parents who can't afford more expensive private schools are pressing their children to attend state colleges and universities. The difference in tuition can be dramatic; one parent of a prospective student says a year at Hofstra in New York could cost as much as $60,000. An aid package for that middle-income parent might bring that down to $40,000 or so, including fees, room and board.
By contrast, a New York State resident student would be charged $5,000 in tuition plus $9,260 for room and board at the State University of New York campuses. According to SUNY, a student's total estimated annual expense is $18,360. At SUNY's community colleges offering associate degrees, the total annual cost would be $14,990, SUNY estimates.
Good, privately financed dorms near campuses often are more expensive than a college's own dorms, but the additional expense often is only about $500 to $1,000 per year. Parents who want their children safe, warm and cared for are increasingly springing for that extra $500 to $1,000, even in these tough times.
We have found that for the Spring 2009 semester, demand is up for student housing near SUNY campuses. Where the buildings used to be 95% occupied, they are now at 99%. Facilities that were formerly 98% filled are now 100% full with waiting lists.
For the year 2009, the student niche may be the best hope for real estate investors.
Michael Dowd, senior vice president of the United Group of Companies, specializes in real estate debt and equity financing. He can be reached at [email protected] or 781-893-4119.