Apartment investors would do well to look to college towns for strong and consistent returns, according to Greg Willett at Institutional Property Advisors.
There is nothing small about the small size of the market in which most are located.
Knoxville, Tennessee, home of the University of Tennessee, recently overtook Ann Arbor, Michigan, and its University of Michigan as the best performing area for market-priced conventional apartments.
Willett, Senior Vice President, National Director of IPA Research at IPA, analyzed this type of housing rather than purpose-built off-campus student housing. In most cases, however, he said student housing developments in these locations are also seeing positive results.
College towns have unique advantages such as stronger economies created by stable working environments. Additionally, some graduates choose to stay in the cities where they attended college, resulting in a general better-educated workforce and generally a greater concentration of higher-paying industries.
When these cities also include regional health centers, they flourish, even more, adapting to the specialty “Eds and Feds”.
Add to that a wide range of cultural events, usually created by universities, and these are great places to be, Willett said.
“With not quite 900,000 people, the Knoxville Metro is just the right size for households looking for that middle ground between a big city and a truly rural setting,” he said.
The other top performing schools according to the IPA are Boulder (University of Colorado) and Eugene (University of Oregon).
Knoxville and Tennessee Corridor overachievers
In Knoxville, vacancy is limited to 1.4% and rents are increasing at an annual rate of 23% to nearly $1,300 per month.
“Looking long-term, the normal vacancy rate here is around 4.5%, and typical annual rent growth is less than 3%,” Willett said.
Construction of conventional apartments underway in Knoxville totals 1,600 units, representing short-term inventory growth of 3.1% for the existing base of 52,300 units, the IPA reported, and no additions. takes place this year at the purpose-built off-campus student housing stock which totals 10,300 beds.
“Adding Johnson City and Chattanooga into the mix with Knoxville, apartment properties along Tennessee’s Eastern Corridor are doing incredibly well right now,” Willett said.
“The Knoxville apartment market has been a quiet outperformer for some time now, and accelerating immigration is increasing that premium. The Carolinas and Tennessee combine to tie Florida and Texas for household moves over the past two years, and much of that growth has gone to smaller eastern Tennessee markets like Knoxville, Chattanooga and Johnson. City.
Ann Arbor lacks off-campus beds
Here, the vacancy rate for the 38,200 conventional apartments found in the metro in June was limited to 2.1%, below the already weak long-term standard of just over 3%. Rents that average over $1,400 per month are up 15% year over year.
“Historically, typical annual rent growth is lower, but the number is still pretty healthy at around 4%,” Willett said.
Ongoing conventional apartment construction in Ann Arbor is limited to some 600 units. Additionally, off-campus student housing deliveries will total approximately 1,100 beds this year.
“Although this is an unusually large student accommodation block, there has been a shortage of off-campus student beds in the past,” he said. “About six prospective students exist for every bed of purpose-built student accommodation product. Sales prices for apartments in Ann Arbor are around $235,000 per unit, which is relatively high for a location in the Midwest.
Rising construction costs have a headwind
Brandt Stiles, director of development at Subtext, tells GlobeSt.com that he’s bullish on many smaller college markets and that Subtext has development completed or underway in Ann Arbor, Eugene, Knoxville and Boise.
“What drew us to these markets was the fundamentals — college enrollment growth, absorption and historical rate growth — which are strong in key dimensions,” Stiles said.
“The biggest challenge we see as a developer in college towns, whether multi-family or purpose-built student housing, is making projects feasible given the headwinds with rising costs of construction, rising interest rates and the demand for qualified and talented subcontractors.
“Profit margins are slimmer, which leaves us no choice but to be more creative at all phases of a project. We only focus on developments from scratch, as we believe we add the most value with new builds, but there are great opportunities in the area of value addition and redevelopment.
Graduate students, visiting professors Rent
Jay Lybik, national director of multifamily analytics at CoStar, told GlobeSt.com that apartment markets in college towns with large research-focused universities have significant built-in demand drivers for traditional multifamily rentals. due to the high number of graduate students, visiting professors plus postdoctoral candidates attracted to these locations.
“Many graduate students prefer housing away from younger undergraduates, given their heavy workloads and more professional work schedules,” Lybik said. “Also, visiting professors help drive rental demand, given that they don’t root themselves in that community.”
Teleworkers return to “their” campus
JLL Executive Managing Director David Houck, who leads the firm’s Integrated Portfolio Services (IPS), Industries and International office, told GlobeSt.com that colleges and universities provide stability to a market, just as the federal government or state capitals bring stability to their respective communities.
“Due to the growing adaptation of remote work, remote workers may choose to return to their college towns and work remotely from there or even retreat to their college communities,” Houck said. “Universities want to have commercial real estate investment in their cities because it not only attracts students, but it helps attract and retain faculty in a highly competitive world.
“Big research universities are also investing in communities of innovation, and there are great examples of cities being powered by universities, and it’s not just Boston — the epicenter of higher education.”
He said a good example is Durham, North Carolina, which has evolved from a former tobacco factory town into a thriving university and life sciences epicenter thanks in large part to Duke University.
Creation of a pool of young professionals
JLL’s Executive Vice President, Public Institutions, Lindsay Stowell, told GlobeSt.com, “Universities want to attract students, faculty and staff and, from a real estate perspective, can do so by offering an attractive built environment on campus, but also by having access to a thriving city with amenities for students, professionals, and families.
“Cities want to strengthen economic activity, attract and retain inhabitants, and the university provides for this temporarily with its students and durably with its employees.
“Developing students into a reservoir of future young professionals who choose to stay in the city can be the larger goal of college towns, and that’s where investment and collaboration come in.
“Not only does the city need real estate amenities such as housing, retail and entertainment, but it also needs employers to establish a presence to recruit students. The university can contribute to this through engagement, research collaboration and the provision of a pool of intelligent and motivated employees. »
University students as “consumers”
JLL Executive Vice President, Public Institutions Eric W. Conrad told GlobeSt.com, “Colleges from coast to coast and border to border are under financial strain. Ultimately, income is generated when students attend college. More students equals more revenue.
“Why do students choose one university over another? Often the decision depends on what students think about safety, building aesthetics, proximity to shops and restaurants, and how transportation or parking work together.
“Students, and often their parents, should be viewed as consumers, so what do consumers expect from the money they pay? The money doesn’t just go to college, but that money trickles down to all businesses around campus.