By Al DiNicola
DST.Investments, LLC
Securities offered through MSC-BD
July 23, 2020
The colleges and universities were first to make a major statement with regards to the COVID pandemic. Many across the country could not believe the NCAA March Madness tournament would be cancelled. Like all others in the country (and around the world) we have entering new territory in all facets of our lives.
Over the years the stability of “universities” has been noted as an institution. These pillars of stability provide a path for many seeking higher education, social interaction as well as avenue to showcase their talents as in the case of the athlete. COVID’s impact on college sports will be the in future discussions.
Student housing, from an investment point of view, has provided stable returns especially in non-commuter schools. Student 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.
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. (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 today’s’ environment. There have been many product designs over the years and one plan may be 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 form the investors. Many of the parents who are guaranteeing the lease for their college student are backed up by six figure incomes and a 700 plus FICO score. If there was a 100-unit complex you may have 300 parental guarantees on the beds.
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 along with the Power Five schools and traditional non commuter schools. Investors like stable, consistent occupancy, tax shelter, appreciation, demand for university in non-commuter schools
So what was the impact 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 has been an interesting situation occur. 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 belonging. 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 was 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 continued to offer on live 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. Management companies with operating strategy for digital needs did very well. If you are a student housing operator and you are behind the times in providing bandwidth, etc. that is a problem. Many rooms have study areas or rooms with the technology and some with advanced technology for conferencing (Zoom meetings, green screens, etc.) in the rooms.
What is counter intuitive is the school closings (or only online) but parents are on the hook for the rents.
Even with remote access to classes it is hard to replace brick and mortar experience. For some schools who decide not to re-open there may be students transferring to other school who provide the on campus experience. As schools decide on reopening (and a large majority are scrambling to do so) what has happened to the student living situation? Many colleges have instituted bedroom to bathroom parity. Meaning each bedroom requires their own bathroom. This “de-densifying” requirement will push 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. 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 many have a solution. The third and fourth bedroom may be converted into a high-tech bedroom and bathroom. Converting into three bedrooms and three baths. Naturally, specific permitting and local jurisdiction will determine the process.
Campus visits were stopped by April so the lease up may not have been completed. There may also be a scramble for space as schools set to open. Online walk through of locations and rooms continue as well as online leasing.
There has been a premium placed on a US education by foreign students (and by foreign parents). Restriction on foreign students returning will create loss of revenue for colleges since many of these students pay full tuition. However, this may permit colleges to accept more US students. Colleges can pivot easily. It appears that the colleges will have testing upon arrival and the fall term for on campus will end Thanksgiving with online classes for the balance of the term. Then all students will be tested again when returning for the spring term.
The big question may be what happens if schools open and there is no college football. College football is one of the biggest divers of the economy. Smaller colleges may not be affected as much as the larger schools.
As we move into August, we will monitor all DST assets offered by Sponsors especially in the Multi Family space which makes up 53% of current DST Sponsor offerings. Student housing offers another 11% of offerings.
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.
For more information on how to properly set up an IRC 1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098.