Raising rents 101

College enrollment is up. Students are taking longer to graduate. Rents are up reports NMHC study.

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A glance at college enrollment figures over the last few decades shows some dramatic trends. Shortly before World War II, only approximately 160,000 Americans were in college. But thanks to 1944’s Servicemen’s Readjustment Act, better known as the G.I. Bill of Rights, in the years immediately after the war, approximately 2.2 million military veterans went to college. A few decades later, a swell of baby boomers born between 1946 and 1964 crowded college campuses; enrollment rose to nearly eight million in 1970.

Now get ready for the millennials, because colleges across the country certainly are. Many of these 75 million children of baby boomers, also known as the echo boomers, will be attending college this decade, and this surge of incoming college students is capturing the interest of real estate professionals because providing private off-campus rental housing to these students can be a great investment opportunity. But even if your firm does not focus on providing student housing, trends in this market will likely affect you in the years to come.

Student housing: a growing market
There are several reasons why many real estate professionals are becoming interested in investing in student housing.

That wave of echo boomers will be filling college classrooms for years to come. The National Center for Education Statistics projects that college enrollment will grow by 11 percent between 2003 and 2013.

College enrollment trends are even better than generational demographic trends — for most of the years between 1995 and 2014, the growth rate in college enrollees is expected to exceed the growth rate of 18 to 24 year olds.

Today’s college students are taking longer to graduate, so they need student housing for a longer time. According to the report Trends in College Pricing 2005 from the nonprofit organization the College Board, almost 40 percent of today’s undergraduates are older than 24.

Higher education tends to be less affected by economic trends. The reason is simple: when the economy is slow, people seek a college degree to improve their marketability in the job market; when times are good, a college degree is an important credential.

The median rent increase among student housing apartments has been higher than the rent component of the Consumer Price Index over the last two years, according to National Multi Housing Council (NMHC) calculations.

NMHC findings
Two years ago, NMHC took its first look at the student housing market niche by examining 64 college towns across the country to see what the demand for student housing was at that time — and what price the market was allowing. To build on that research, it returned to those same 64 college towns this year to look at rent growth between 2004 and 2006.

To get a helicopter-level view, they calculated a median rate of 7 percent overall across all 64 markets and across all the different types of units (studio, one-bedroom apartments, two-bedroom
apartments, etc.) This 7 percent growth rate slightly exceeds the 6.5 percent growth in the Consumer Price Index’s broader rental measure during the same period, indicating healthy rent growth in student housing.

Such a broad median figure is only a starting point. Before investing in a particular college town, it pays to do your homework. Not surprisingly, of the 64 college towns we examined, many of those that recorded the biggest rent growth between 2004 and 2006 were in areas with already high housing costs. With some of the highest housing costs in the country for both rental and owned housing, California’s student housing picture mirrors those high housing costs.

For example, Stanford University has the highest rents for a two-bedroom/two-bath as well as those with three-bedroom/two-baths; $2,069 and $2,534, respectively. And the University of California at Irvine has the highest monthly rents for studios ($1,394), one-bedrooms ($1,481), and two-bedroom/ one-bath ($1,637) apartments.

Important implications for the future
No longer content with one shared bathroom per hallway and a single TV lounge, the millennials starting college in 2006 expect a full range of amenities; cable television, high-speed Internet and fitness centers are some of the luxuries they demand. So, studying student housing can provide an important lesson for developers and operators of all multifamily housing. When today’s students graduate, they are going to demand the same amenities in their post-college housing — in other words, since today’s students are tomorrow’s apartment renters, the entire industry is wise to pay close attention to what today’s students are seeking in their housing.