As Tier 1 student housing continues to draw crowds, the market is growing more competitive. That’s leading investors to look at properties at Tier 2 schools. It may be a better investment in the long run because every year, more students are choosing Tier 2 schools and those kids need a place to lay their heads. Here are three reasons why Tier 2 is becoming the belle of the ball.
1. Demand
Stonemont Financial co-founder Bob McMahon (pictured, with his two sons) tells us demand is growing for student housing at Tier 2 universities, but there’s just not a lot of product being developed there. Because of that, developers can get good pricing on land next to the university. Location is everything for a student housing project, Bob adds. Additionally, many of these universities are looking to private developers as partners to help meet the housing needs of their increasing enrollments. The public universities, in particular, don’t have the funds to build student housing on campus, so they’re much more welcoming to developers and willing to point students in their direction. There are also Tier 1 schools capping enrollment and increasing acceptance standards as more people returned to college when the job market tanked a few years back. That move drove more students to the Tier 2 universities as a back-up option.
2. Dearth of Developers
In the last two development cycles, Bob says private student housing developers have shied away from Tier 2 and focused almost solely on Tier 1 universities because they’re considered safer investments. Large student housing capital sources like Fannie, Freddie and larger student housing REITs prefer to back developers only at the Tier 1 campuses, he tells us. Stonemont likes Tier 2 schools and is finding success there, like its project at Salisbury University in Maryland. Not only is university enrollment growing, but the city is one of the fastest growing in the country, Bob tells us.
3. Better Investment Environs
A lot of investors think a Tier 2 market will sacrifice in yield, but Bob says the reality is that the ROI can be great because owners don’t have to sacrifice on the rent side because of the lack of competition. Additionally, because there are many developers chasing deals at the Tier 1 schools, projects have to be built farther away from campus because there’s nowhere else to go. To get students to live three miles from campus, developers have to add the “next big thing” like movie theaters and lazy rivers. Tier 2 projects don’t have to add the bells and whistles to attract residents because there’s not a lot of competition in place, Bob says. Pictured is Station 74, a Stonemont property serving Murray State.
