Over the past few months, we have seen an increase in the number of student housing communities that buyers are converting into traditional multi-family properties.
Here’s an overview of the factors driving this trend, the types of student housing that are best suited for conversions, financial issues to consider, and potential impacts on the student and multi-family housing markets.
When a conversion makes sense
Buyers are interested in converting student housing communities in any market that meets the following criteria:
- Occupancy less than 90%;
- Located over 1 mile from campus;
- Located in a market where new pedestrian-friendly student housing communities are located less than half a mile from campus;
- Located in a strong multi-family market.
Simply put, the competitive landscape favors student housing communities that are within walking distance of campus. In turn, it may make sense to convert an older, less successful asset away from campus into a traditional multifamily.
The upside potential
Multi-family institutional investors, family offices and high net worth individuals are the largest categories in the buyer pool for these conversions. In fact, where student accommodation meets the criteria listed above, we have seen these groups bid much more aggressively than typical student accommodation operators. Multifamily also offers better capital market fundamentals, such as lower capitalization rates, higher funding leverage, and lower interest rates.
In strong multi-family markets, the keys to success in acquiring and converting student accommodation look like this:
- Buy the property for less than 50% of the replacement cost;
- Invest $40,000 to $50,000 per unit to redesign floor plans and make upgrades;
- Increase occupancy by reducing the number of bedrooms included in floor plans;
- Set rental rates competitive with other multi-family communities in the area;
- Lower expenses.
In terms of competitive advantage in the local multi-family market, student housing conversions can provide families with attractive rental options. For example, converting a 4-bedroom/4-bathroom student housing floor plan to a 3/3 – where one bedroom is a master bedroom – can provide a family with four better living options than a traditional 2/2 multi-family floor plan. In markets where one-bedroom units are rare, the conversion from 4/4 to 2/2 and 1/1 has also proven very attractive.
Costs to keep in mind
Those purchasing a student housing community to convert into a traditional multifamily can expect expenses that include, but are not limited to:
- Remodeling Floor Plans: Renovations can include reconfiguring floor plans to reduce the number of bedrooms and bathrooms, moving walls, and closing hallways.
- Upgrade finishes: As many of these properties are older, upgrading the finishes will help meet the current standards of a multi-family tenant. For example, it may be necessary to replace kitchen and bathroom countertops with granite, install new stainless steel appliances, and replace carpeting with hard flooring.
- Replacement or upgrade of equipment: Community amenities may need to be added or converted to align with tenant expectations. For example, this may involve upgrading fitness center equipment, converting an unused volleyball court into a playground, or transforming study rooms into individual offices.
Before buying student accommodation for a multi-family conversion, buyers should be aware of the floor plans and whether they are viable to cut. For example, after converting a floor plan, will you have rooms without windows? Or if you are planning to move a bathroom to a place where there is no plumbing in the wall, do you have the budget to add plumbing costs?
How conversions impact local markets
It is clear that students prefer to live within walking distance of campus. So when student housing further from campus is converted to traditional multi-family housing, it helps the student housing market stabilize across the board, with increased occupancy and rents for properties closer to schools.
Additionally, in markets where multi-family homes are in high demand, converting these properties adds more multi-family inventory to the area. It’s a win-win.
In conclusion, we expect this trend of converting lower-performing student housing into multi-family housing to continue over the next few years, particularly in markets where student housing development is underway at less than half a mile. mile from universities. Student housing communities less than 90% occupied more than a mile from campus will continue to provide multifamily buyers with an excellent option to convert properties and create appeal for multifamily renters.
Sean Baird is managing director of student housing investments at Colliers in Tampa Bay and has been involved in over $2 billion in student housing transactions since joining Colliers in 2003. He can be reached at [email protected] and (727) 450-6158.