Demand for student housing remains high, rents are rising and institutional investors have returned to the space in earnest, despite an overall decline in undergraduate enrollment. Transaction volume in the student housing sector reached more than $10 billion in 2021, the second-highest level ever recorded and more than double the sales in 2020, according to CBRE figures.
One reason for the near-record sales volume was investor flight to student housing driven by a yield spread that was the widest it has been since 2013, says Jaclyn Fitts, CBRE executive vice-president and co-leader of the firm’s national student housing team.
The average delta between multifamily and student housing cap rates in 2021 was 56 basis points. The gap was at its widest in the second quarter of 2021, when the student housing cap rate average was 5.3 percent, compared with 4.7 percent for multifamily housing, according to CBRE.
There is another reason behind the 2021 transaction volume: for the 2020-21 school year, student housing occupancy rates had declined 4 percent, but for the 2021-22 school year occupancy rates rebounded to a level that was even higher than pre-covid levels. That, along with increases in average rents, showed investors that the sector was resilient. “The industry as a whole held up very well,” Fitts observes.
Institutional capital and some large non-US investors had waited on the sidelines to see how student housing would perform through the pandemic. And as the sector proved it was recession-resilient, those investors returned in late 2021 with several large transactions, Fitts says.
Growth despite enrollment fall
Despite an overall decline in the undergraduate student population in the US and the closing of smaller colleges, the investable student housing market is growing, says Jeff Adler, vice-president and general manager of Yardi Matrix, which tracks student housing data. The firm compiles data for the Yardi 200, a listing of the 200 largest public and private universities by student population, which represents 90 percent of all off-campus student housing in the US.
The overall number of undergraduate students is declining, because of demographic changes. National Student Clearinghouse Research Center numbers show that overall undergraduate enrollment dropped 3.1 percent in fall 2021, compared to one year earlier. Enrollment has dropped by more than one million over the past two years.
But Adler says he has a positive outlook for the off-campus student housing market because enrollment at the largest schools is growing. The higher education industry is consolidating, with smaller private liberal arts schools and some smaller state schools closing, but 90 percent of all off-campus student housing in the US is concentrated in the 200 largest public and private universities.
“In an environment where total enrollment is headed down, consolidation is a big story,” Adler says. “If you just look at the broad numbers of school-age kids, you say, ‘Oh, my gosh, the sector is not going to do that well because it’s got fewer people.’ But the consolidation actually means that as an investment it can continue to grow even in the face of the overall decline in the school age population. And that’s a huge thing.”
Tailwinds for student housing
The enrollment decline bears watching, but the student housing market has several other factors working in its favor, Adler says. A college education remains valuable, and students value the in-person experience of attending college. Larger school endowments are still doing well. Off-campus student housing tends to focus on the top 30 to 40 percent of students, socioeconomically.
Also, student housing is generally viewed as a defensive sector: When there are downturns, its performance remains steady. During the 2008 global financial crisis, enrollment increased, for example.
“Consolidation actually means that as an investment it can continue to grow even in the face of the overall decline in the school age population”
“Even in the scrambled eggs of covid, the sector actually performed fine,” Adler says. Student housing rent growth was limited to 1 or 2 percent, but it was generally full. “The kids wanted a place to go to that wasn’t at home.”
Student housing behaves like a submarket of multifamily, but it has less volatility than conventional multifamily and a slightly higher return, based on its capitalization rate. The sector has benefited from Freddie Mac and Fannie Mae
One of the defining features of student housing is that it is rented by the bed, so the student and their parents aren’t on the hook for the roommates’ rents. Also, it tends to have a more upscale amenity package compared to multifamily alternatives.
“It is a unique niche within multifamily,” and it runs off a different set of dynamics than with multifamily, Adler says. “You don’t look at job growth; you don’t really look at migration patterns. You look at what’s happening at that school: Is its enrollment growing? Is there a need for dedicated student housing?”
The student housing sector is also beginning to transition from a purely development-led sector to one that also has enough mass for sales of existing properties, which is playing a larger role in the sector as the housing stock grows. “It’s a brand-new product; it didn’t exist 20 years ago,” Adler says.
Rent increases coming
In 2022, the sector is performing extremely well, based on rents and preleasing figures – what students have agreed to rent when the next school year begins. Both measures were even better than in 2019, before covid. “Within the investable universe, the segment is growing and the fundamentals this year are fantastic,” Adler says.
As of the end of April, the Yardi 200 had preleased 72.7 percent for fall off-campus move-ins, up 12.9 percentage points from one year earlier and up 8.1 percentage points from April 2019. As of March, average rents for the Yardi 200 were $777 per bed, up 2.9 percent from one year earlier and up 0.5 percent from the month before.
Rent growth accelerated significantly in April, driven by the limited supply of student housing and owner confidence in the lease-up, Adler says: “You only have so many units left to rent, you might as well start pumping the rents up.” Student housing is also boosted as a derivative effect from the rapid rise in rents for multifamily. “[For] the schools that are in cities where multifamily is also doing really well, they’re doing exceptionally well,” he says.
Within the Yardi 200, the larger schools that have lower acceptance rates, modest student housing supply and higher capture opportunities are also performing even better than their peers.
CBRE’s Fitts says that anecdotally, student housing rents are expected to increase by 5 to 10 percent in the coming year. When the pandemic hit in March 2020, multifamily rents started dropping while student housing rents held steady because many leases for the 2020-21 school year were locked in. Then, multifamily rents rebounded and grew significantly through 2021 while student rents did not, because rents are adjusted only once a year.
Now, student housing rents are expected to grow similarly to multifamily increases, Fitts says. “We’re starting to see the rental increases that the multifamily sector has already experienced, and that’s really just been the delay associated with us only leasing once a year.”
“We’re starting to see the rental increases that the multifamily sector has already experienced”
The lack of new student housing developments in the pipeline – substantially less than past levels of planned development – will also strengthen individual student housing markets. “That will drive future rent growth in those markets as well, because we’ve continued to see really strong occupancies across the sector,” Fitts says.
Many university areas have simply run out of land available for new pedestrian student housing – housing within walking distance to campus, defined by CBRE as within a half mile, Fitts says. Pedestrian housing is the most attractive type of student housing for institutional investors.
For the non-profit Provident Resources Group, the 10th largest owner of US student housing, the goal is to keep rents as low as possible. That is becoming increasingly difficult with rising interest rates and global supply-chain issues driving up the cost of construction materials, says Steve Hicks, Provident’s chairman and chief executive officer.
“We’re seeing a lot fewer potential housing projects, certainly than what we saw on an annual basis pre-covid,” Hicks says. Nearly all of Provident’s student housing inventory is on campus, owned in partnership with a university, while private equity investment in the space is primarily in off-campus housing.
Investor interest in student housing was spurred by Blackstone’s big bet: its $12.8 billion acquisition of American Campus Communities in April, which made the behemoth investment manager the largest owner of student housing. That deal has been viewed by other investors as a vote of confidence in student housing, Fitts says.
The Blackstone deal is “an indication of what the private equity markets think about the student housing; they’re strong believers in it,” Hicks says. Another indicator is the willingness of some PE investors to buy student housing with cap rates of around 4 percent, or even sub-4 percent cap rates, or to pay $150,000 or more per bed for a student housing project, he says.
“That’s huge,” he says. “It’s reflecting the long-term value that the institutional investors see in student housing.” And, it reflects an understanding that state universities and non-profit private universities likely won’t be able to finance student housing projects of their own to handle all of their students’ housing demand, he says.