Student Housing Investing Strategies, With Brian Nelson

Student housing is a multifamily property type that can offer passive investors tremendous upside. On this episode, Brian Nelson, President and Co-Founder of Versity Investments, LLC, joins to share his perspectives on the student housing landscape. This episode was recorded live from the ADISA Spring Conference 2022 in Orlando, Florida.

Click the play button above to listen to the conversation.

Episode Highlights

  • Why student housing is such a compelling multifamily property type for developers and investors.
  • The story behind Versity Investments and how Brian and his team found success in student housing.
  • How student housing needs and preferences have changes in the wake of Covid-19.
  • Which markets Brian likes for student housing, and what he finds exciting about them.
  • Powerful trends currently impacting the student housing landscape.
  • How rent rate increases across the country are impacting student housing as well.
  • What the future of student housing may look like.

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Versity Investments, formerly NB Private Capital, is a real estate investment firm specializing in student housing and multi-family projects.

About The Multifamily Investor Podcast

The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.

Show Transcript

Scott: Hello, Scott here with live at the Spring 2022 ADISA Conference in sunny Orlando, Florida. I don’t know if it’s sunny today. It was sunny yesterday, but I am really happy to be here and joined by Brian Nelson, who is the president and co-founder of Versity Investments, LLC. And today, we’re going to be talking about student housing, which is really exciting to me because we’ve done a bunch of these episodes and I have yet to really cover student housing.

Brian, thank you for being here. I always like to kick things off with sort of a big high-level question. So, why is student housing such an important and really compelling multifamily property type?

Brian: Well, I think it’s a great question. I really appreciate the opportunity to talk with you today. We’ve been doing the student housing now for 15 years, and I’ll tell you really what got us into student housing. We weren’t really just…we weren’t student housing guys. What we recognized is a lot of investors were looking for stability, especially with recessions in the last recession.

They want something that’s not going to be vulnerable to that or tied to the next real estate cycle or economic cycle. And universities are pretty unique in that they’re tied to the historical stability of a major university picture USC or Notre Dame that’s been around for, you know, 150 to 200 years, have withstood the world wars, the great depression.

You’d be hard-pressed to find a more stable institution than a university. And so, we like that as an economic anchor, but then you look at what other investors want. They want stability, they want recession resilience, but they also want cash flow. More and more people want income now. I think a poll we saw a few months ago by Merrill Lynch show that 81% of retirees today have income as their number one or their number two, number one top objective.

So, people want… They want cash flow. They want stability. They want long-term growth, and they want tax benefits. We just felt that the right student housing, the well-positioned student housing property could hit on all of those benefits in one investment if it’s done well, and so we thought what we liked about student housing was how well it matched what most investors are looking for today, and that’s really why we nose-dived into student housing all in.

Scott: I mean, that makes so much sense, and I’d also add to it. You know, I’ve seen when you look at trends, when you do have things like a recession, a lot of people say, “Well, I guess I’ll just go back to school,” or, “I’m going to go get that graduate degree,” or whatever it might be. So, I think that’s just another data point there for the power of student housing.

Brian: 100%. I’ll just say this, student housing was always treated as a subcategory of multifamily until the great recession. And when the data came out, it was one of the strongest performing assets, hands down, and starting in about 2011, 2012 after the data revealed that student housing was a strong performer, CBRE and a lot of the other companies started treating student housing as its own separate category.

But since that came out, you’re seeing a huge influx of money from institutions, smart money coming into the space and that’s because they see the data, everything we talked about, how well it matches and how well it delivers on so many benefits and it’s been oft-overlooked. And there’s a couple of reasons why. I’m sure we could talk about that. But what we’re seeing is more and more companies are coming into the space as they learn more about it, and that’s always a good sign.

Scott: Absolutely. I want to cover a lot about student housing, but before we do that, could you speak a bit more about the story behind Versity Investments and sort of your involvement in student housing?

Brian: Oh, yeah. Well, and a lot of it I just spoke to how well it resonates in terms of what benefits people are looking for. But I grew up in real estate. My father sold apartments, the limited partnerships of the ’80s, and it was all feast or famine, you know, up and down with the cycle. And I didn’t really want that, so I got an MBA. I wanted a more stable business career, so to speak, as a family, you know, four kids, and wanted to raise my family with the stability that we didn’t have.

We had up and down, but I loved real estate. And I love the concept of a brick and mortar investment, the cash flows that has tax writeoffs that appreciates over time, and then you can defer the capital gains in your next step. So, the benefits of real estate are hard to pass up, and when you can marry that with the stability of the university, you have something really special.

So, we learned about that in 2015. We saw that in California where we were from a lot of people were looking for an exit strategy for highly appreciated equity through the 1031 but they wanted something different. They wanted something that mirrored what they were looking for, but helped them avoid the cycles. And that’s where we put those two together and really got involved.

Scott: That was just boom.

Brian: Yeah.

Scott: So, I guess speaking to the current landscape, I’m curious how student housing, I guess, needs and desires have changed in the wake of COVID-19 and where things sit today.

Brian: Yeah. Great question. What we saw with student housing, typically in any given year, student housing across the country is going to be about 92% occupied. If you’re within two or three blocks to campus, you’re usually going to be about 97%, 98% occupied. What we saw during COVID was really strange.

The market occupancy was very fragmented, but overall, it went down from 92% to 89%, so just 3%. So, it took maybe a half a step backward, but what you’re really seeing in the data was that a lot of schools that stayed open were moving students out of their dorm off to private housing. So, some markets were seeing rental rate growth, record occupancy, while other schools that were shut down were like ghost towns, and so you’d have occupancy at the 40% to 50% range.

Kids who didn’t want to stay at home with mom and dad, mom and dad didn’t want their kids staying at home so they sent them off to school at least to do their online work right next to the university. So, you had about a really strange mix. And what we’re seeing now is enrollment is stronger than ever. Applications this year are about 10% higher than they were last year and about 6% higher than they were in 2019 pre-pandemic.

So, we’re seeing more and more kids coming back, and the two drivers for that are very long-term sustainable factors. One of them is you’re seeing access, more underrepresented minorities now coming to school, applying to school, and you’re seeing about a 33% increase in international applications, particularly from India and Pakistan and China, countries like that, really populous countries, and they have this large premium on U.S.

education and they’re coming. And so, we’re seeing more and more universities grappling with record applications, very difficult to get in. UCLA, for example, two weeks ago announced that they had 150,000 applications.

Scott: Oh, my gosh.

Brian: So, they’re only going to take 4,000 or 5,000 of that. So, you can imagine that it’s getting harder and harder to get into schools where a lot of people have kind of thought, “Oh, well, this online component for school, maybe people aren’t going to go to the universities.” It’s just the opposite.

Scott: It’s not happening. Wow.

Brian: Yeah.

Scott: So, I guess, and you mentioned UCLA, so I’m curious about any specific markets you like for student housing and what you might like about them as you’re looking across the landscape.

Brian: Yeah. Great question. So, student housing has always been pretty stable because if you buy a property really close to campus, you could predict with pretty consistent knowledge, predictability, that 30,000 kids are going to come back to school, you know where the market share, how it’s going to divide.

And the only real disruptor over the last 10 years has been new development. So, there’s been a lot of new development. Sometimes you’ll have a market where you have four or five new properties competing and throwing out concessions. And that disrupts everything until it stabilizes. Usually takes a couple of years to absorb. But what we’re seeing now with inflation, post-COVID, almost every student housing property needs to have what we call bed to bath parody, which is every student has their own bedroom and they get their own bathroom.

And that’s really expensive for new developers to build, and with inflation already up and then the infrastructure bill coming, we think labor, material costs are going to be really expensive, and we’re just going to see some of the fewest deliveries that we’ve seen in student housing in over a decade. Combine that with growing demand and growing enrollment and limited supply growth, you’re seeing very favorable dynamics.

So, we like universities that are Power 5 schools. We’re seeing more and more kids go there because they want to have that experience to go to the Greek experience or go to the football game, the basketball.

Scott: Right. Go to the full game, whatever it might be. Yeah.

Brian: You can’t replace that in your parents’ basement. And we like schools that have in-state tuition under $10,000 or under $12,000, so very affordable. Kids are graduating these days getting $60,000, $70,000 starting income. So, they’re paying that off within just the first year or two. So, we look for the ROI factor, and we like growing enrollment schools with natural barriers to entry and I think those are going to do really well during a time of inflation where you can raise rents every four or five years.

I think one aspect of student housing that a lot of people don’t pick up on is even though the students might come home for the summer, they still pay 12-month leases now. That’s now standard in most universities. So, that’s something we look for in a market to answer your question. We want 12-month markets. And almost every student lease now is guaranteed by a parent. So, when you look at if you have 400 units in a property, you might have four bedrooms each, so you’d have 1,600 tenants.

You actually have 1,600 unique leases now guaranteed by parents who own homes, have their jobs, six-digit incomes. So, you have a very stable high caliber tenant ratio. Yeah.

Brian: Yes. Stable. I was just thinking in my head stable, stable.

Brian: Yeah. And it’s really well-diversified, you know. We’re buying a property. We were looking at a property at University of Alabama. Well, 60% of the students come from out of that state. So, your parents are coming from different industries, different parts of the country, so it’s a really well-diversified revenue source as well. So, that’s what we like about student housing, high caliber tenant, long-term 12-month leases, and now with inflation, we’re seeing rental rate growth about 4% or 5%.

And that’s huge. I think that’s going to attribute to or contribute to really nice appreciation over the next four or five years.

Scott: Sure. Sure. Are there any I guess maybe recent projects specifically that you could speak to that are pretty exciting that you’d like to highlight?

Brian: Oh, yeah. Well, you know, we bought a property in 2015 at the University of Colorado, and they had just legalized marijuana back then, you know. That was before the wave started coming. And what they started seeing was Uber affluent out of state coastal students were applying to Colorado more than any other.

Scott: To go to Colorado.

Brian: Yeah. And you know how administrators are. They see out-of-state tuition really high. So, we bought the best-located property with the highest premium units. And we bought that in 2015. Average rent per bed was about $1,100. It’s now $1,700.

So, it’s what? It’s about seven years. We’ve raised the rent about 50%. Up until COVID, we’d never had a vacancy. So, we leased the property every year, 100% occupancy. We paid 7% income, fully tax-sheltered through depreciation. And we’re now selling that property.

It’s been under contract. Investors would make about 60%, 70% appreciated profit. So, they’re making money on the back end. They’re making really good income, fully tax-sheltered through depreciation, but they slept really well at night because we’ve kept the property full, so your risk-adjusted return is very compelling. And a lot of that’s buying the right property, buying at the right time, but that’s essentially a really good example of…you know.

Not every property is going to work out that perfectly, but that’s what we strive for.

Scott: Yeah. I mean, that really illustrates, I guess, everything you were speaking about a little bit ago and kind of brings it all together about finding the right market, finding that right opportunity, and then just having the good solid backbone of, you know, the university there and students wanting to apply and go there, right?

Brian: A hundred percent. Yeah.

Scott: And you were touching on this, the rent prices across multifamily. That is something that folks are talking about. And I think there’s a lot of questions on, well, you know, will it be sustainable? What will happen? Can you speak more to the impact that you’re seeing on student housing specifically as we see these rental rates increasing?

Brian: Yeah. Great question. Nationally, right now, as of today, year over year, rents are up about 3.7% in student housing across the board. Properties that are closer to campus are getting a much greater premium. There’s a lot of drivers for that, you know. Something that’s really unique about generation Z, they don’t really like cars. They don’t want to come pay the full insurance, have the car payment.

Scott: Deal with parking it, all that. Yeah.

Brian: Deal with parking it, the carbon footprint. And with Uber, you could live at a place like Boulder, still take an Uber to the Denver Airport, and fly home. It’s not a big deal, but what you’re seeing is a consequence of that is they prefer to be closer to campus and mom and dad want them closer to campus. They tend to be more safer, feel safer. They tend to have better grades.

A lot of data shows if you’re within closer proximity, your grades are higher, and you’re closer you’re more involved at school. So, what we’re seeing is a migration back towards location. Like it always is fundamentals with real estate, be close to campus have a sustainable competitive advantage that differentiates you. It’s something that’s really important to students, and location is usually one of those big drivers.

So, that’s one thing we’re seeing is a greater emphasis on that. But we’re seeing rental rate growth in our portfolio. We’re about 7% year over year, so we’re about double what they’re seeing in student housing, but it’s a little bit stronger closer to campus.

Scott: Sure. Sure. I’m curious about some of the unit characteristics or development considerations for student housing that are different than other multifamily property types. Like, what are some of those considerations that kind of make it unique?

Brian: Yeah, and it depends on…The people familiar with student housing today would recognize it. People who haven’t seen what type of experience students are having are shocked because the stuff that we all had when we went to school…You’re pretty younger. You may have had a pretty nice…It’s like a resort. It’s like a Vegas-style resort experience.

And parents are willing to pay for that, you know. Grandparents have more money. They’re more involved. But ultimately, kids, the parents want them to have a great experience, and this might be their last hurrah. But they ultimately are willing to pay more. And so, you’re seeing almost like a gentrification in student housing where a lot of the old ugly properties are being either refurbished and renovated, or you’re just seeing brand new properties being built with the full amenities, from high-level fitness to, you know, state-of-the-art pools or resorts.

But a couple of the trends, to answer your question, three or four things you have to have. You have to have bed-to-bath priority. Everybody gets their own bathroom. That’s pretty common, especially for female students, no surprise. A new trend, washer and dryer.

You have to have a washer drying units. The idea of sharing…

Scott: In unit.

Brian: In unit. Wi-fi is a must, right? Everybody streams everything. But the biggest trend we’re seeing more so than ever is the therapy animal, the small dog or cat, the pet that’s tied close to the student. Post-COVID, everybody seems to have one. So, a lot of the newer properties have dog parks, dog wash stations, things like that. It’s very profitable for the landlord, you know.

You have very tight restrictions. But, you know, they’ll usually pay $100 or $200 pet fee. It’s very bottom-line money, but it’s very critical. So, that’s something that’s really emerged as a trend post-COVID that might be a shocker to people.

Scott: Yeah, I think so. I mean, as you’re describing that, I’m like, “Wow, that sounds like really nice housing for young professionals just out of college, not necessarily college students, but you’re saying that there’s a lot of the expectation now that these amenities exist and this kind of quality, right?

Scott: Oh, completely. And where it differs from multifamily is you’ll never see a multifamily with four equally sized bedrooms and then four bathrooms right next to it.

Scott: Right. You wouldn’t see that.

Brian: Right. But you are starting to see inner cities high density, we’re housing for young professionals, the 20 to 30 some in that range where trend called cohabitation. A lot of the properties are adopting that same model where you might have a co-guarantor but you have people either sharing a bathroom or having their own but you have this concept of three or four equally sized bedrooms in the inner city, you know.

It’s a trend that’s following the student model, and I think that’s something that’s going to pick up over the next few years.

Scott: Sure. As we wind down our conversation, and always I’m a big fan of looking to the future and seeing, okay, well, where are things going? We’ve talked about a lot of the fantastic elements of student housing today. So, when you look to the future, maybe innovations, what future trends might you think might come about when it comes to student housing?

Brian: Yeah. Really good question. A lot of it is just understanding what the challenges are for students and what their parents are concerned about. I think you’re going to see a further push towards security, just making sure people sleep well at night. How do we use technology to make people feel more comfortable, more safe? That’s going to be a big element, especially with female students. You’re actually seeing more and more, almost every university has a majority female, and so, you know, we’re training more towards that way.

Developers like economies of scale. So, they’re going to build more four and five-bedroom units. At the same time, the market is going in the opposite. People like the one or the two-bedroom unit, fewer roommates. So, we’re seeing the trend kind of go away from the economics, and that’s where I think it’s a really good time to buy the one and two-bedroom units because those are going to be easier to lease-up with fewer potential disruptive competition.

Scott: It’s going to be really interesting to see how it all shakes out, and clearly, you all are going to be right at the epicenter of a lot of it, which is fantastic.

Brian: Yeah.

Scott: And if folks want to find out more about what you guys are doing, they want to connect, where can they do that? Where should they go?

Brian: Yeah,, so versity, V-E-R-S-I-T-Y just like university. You know, that’s been our company name. We just adopted that about a year and a half ago when we went over the billion-dollar asset under management mark. And we like it because it really represents who we are, the focus on student housing. We dominate market share in our industry for that.

We’ve been doing it longer than anyone. We’ve done over $2 billion now, and at the same time, we’ve now gone full cycle in our 10th property. So, we’ve done really well in the category. We’ve also pivoted a little bit towards multifamily. We see a really good time right now with interest rates where they are and inflation where it is. I think it’s a great time to buy newer student housing and/or newer student or multifamily in certain markets. We believe certain economies are going to be big winners in the post-COVID Biden economy.

And so, we just see great times, great opportunities to buy right now and we’re seeing a lot of money coming into the spaces you’re seeing. So, we’re just trying to anticipate where the market is going to be six months by now and try to beat everyone. So, two years ago, we were buying in Austin and here in Orlando and we’ve done really well, and now we’re looking at kind of that secondary tertiary markets that are just about to explode.

So, we just bought a property in San Diego and we’re looking at other markets like Houston or Dallas that are a little bit behind Austin.

Scott: Awesome. Well, thank you so much for joining me and really sharing such great insights on student housing. Appreciate it.

Brian: Yeah. Thank you. I really appreciate it. It was great to speak with you.

Scott: Absolutely.