Multifamily developers and investors are taking a new look at privatized student housing as a business opportunity. Yet what hasn't been publicized is a quiet but growing trend that mitigates the risks associated with typical student housing and maximizes the returns. There is an underserved luxury-apartment niche near college campuses, and savvy developers are seizing the opportunity.

America's top academic institutions have not only undergraduates, but also graduate students, faculty and administrators who need a place to live that is close to campus. There are also young alumni beginning their professional lives, yet reluctant to leave the vibrant university neighborhood. Finally, affluent parents prefer that their offspring live in upscale housing that is well managed and secure.

This audience demands luxury apartments and will pay higher rents for them. They want amenities like hardwood floors, high-speed Internet, marble-tiled bathrooms and kitchens, granite countertops and security alarms. But in most cases, there is little inventory available.

Consequently, these potential tenants turn to upscale buildings in less convenient parts of the city, where they pay sky-high rents, only to commute to work or school. Imagine that a developer comes in and builds an upscale residence for this growing market — right in the neighborhood where they want to live.

Why the Hesitancy?

Many developers aren't taking advantage of this opportunity for several reasons. First, they relate student housing with the stereotypical undergraduate off-campus apartment — complete with empty beer kegs, sagging front porch and kitchen appliances from the Eisenhower era.

Second, there are extra costs associated with student housing, which makes some developers refrain from investing too heavily in the buildings. Property management costs are higher than for a typical multifamily development, as more resources must be devoted to serving students. Plus, there is greater risk of property damage and bounced rent checks.

As a result, developers and investors may question whether the challenges of developing privatized student housing are worth the risk. However, if a developer can identify the right market opportunity, the answer is a resounding “yes.”

A Classic Example

In 2000, it was clear that no luxury housing for graduate students and faculty existed near the University of Pennsylvania in Philadelphia. The school also attracted many young professionals who required a higher standard of living. Most lived a mile or two away in the city's downtown neighborhood, but many would have preferred residing close to campus in University City.

To determine the potential market for this type of housing, Campus Apartments obtained demographic data from the university's housing office that indicated an unmet demand for housing near campus. Campus Apartments then decided to redevelop an older building near campus and invest in luxury amenities, banking on the opportunity to be the first in the neighborhood to offer this type of housing.

Campus Apartments purchased 4111 Walnut, a six-story, 84-unit mid-rise apartment building two blocks from campus for $15,000 per unit. Many developers had overlooked the property — for good reason. Years of neglect had reduced it to the status of an abandoned tenement.

The strategy was to reposition the property, retaining its 1920s-era architectural details while updating it with modern conveniences. Each unit received new appliances, a video intercom system, high-speed Internet and security alarms.

In the end, the finished building proved so attractive that 75% of the units were pre-leased before construction was completed. Development costs totaled $40,000 per unit. The property was appraised at $72,000 per unit at the time of permanent financing.

Clearly, there was a market for upscale student housing. Today, 4111 Walnut is a coveted address. The successful redevelopment of the property has spurred additional private investment along neighboring blocks, including a new University-owned movie theater and upscale grocery store. Campus Apartments owns and manages more than 3,000 apartments in the area. For each, there's a waiting list.

Now is a great time for developers to take advantage of this profitable niche, but it's important to note that experience and knowledge are the keys to success. Those who develop properties for this underserved market will find privatized student housing provides far more reward than risk.

David J. Adelman is president and CEO of Campus Apartments Inc., based in Philadelphia. He can be contacted at dadelman@campusapts.com.