Jim Tatum
Strong fundamentals continue to drive a robust student housing market nationwide.
According to the Yardi Matrix Fourth Quarter Student Housing Report, which tracks more than 200 colleges and universities across the U.S., the industry continued to outperform into the third quarter, with a record number of bedrooms leased in September and rent growth strong. The fall 2022 preleasing period, which ended in September, saw 96.6 percent of bedrooms leased – a 2.3% increase over last year, and rent growth at 4.1 percent, in the 200 schools across the country.
Investors, impressed by the sector’s strong performance, are increasingly attracted to student housing. Thus far, some $3.9 billion in sales volume has been recorded on Yardi 200 universities through September. Student housing is especially attractive because it is not as competitive as multifamily and it has high growth prospects, especially given the increase in students returning to campus post-COVID.
Some aspects of the market are cooling a little. New project numbers are down, with about 18,000 bedrooms delivered at Yardi 200 universities over the past 12 months, down from 30,000 bedrooms last quarter, according to the report. As a few universities have reported shortages of student housing, this could boost preleasing and rents, but pose a problem for schools unable to house students.
Consequently, colleges and universities are placing greater focus on new and creative ways to provide this important amenity.
According to JLL, public and non-profit institutions make up more than 85% of degree-granting institutions in the U.S. However, as major four-year institutions continue to grow, enrollment appears to be declining only at schools that do not have strong student housing options.
“Student housing is critical to a residential university’s student experience and is an important recruitment tool, and some universities are grappling with old housing stock or how enrollment has outpaced the number of beds on campus,” said Lindsay Stowell, executive vice president of higher education for JLL. “Creative solutions like public-private partnerships can be a mechanism to source capital and deliver new housing more efficiently than traditional university construction approaches. In the face of challenging economic circumstances, buying or leasing existing buildings is another solution. Being flexible and exploring all options is key.”
Public-private partnerships leverage the strengths of educational institutions and the private sector. While these deals can be complex, they can also be beneficial to both schools and private parties.
According to the JLL report, pre-leasing in the 2022-2023 school year has greatly outpaced the past two years, returning to pre-COVID levels. As of September 2022, the average multi-housing effective rent was 25% higher than the average student housing effective rent in the top 10 states with the most expensive student housing, making student housing much more affordable for these students.
Nonetheless, student housing, like all construction projects these days, is expensive to build. Total construction spending, on average, is up 11% year over year, and construction backlogs averaged nine months for most contracting firms, up 1.4 months from the prior year, according to the JLL.
One way to reduce costs is through value engineering and deciding what the most important characteristics are in the construction of a building right now. This allows the developer to trade off some of the features desired to get the building delivered now versus years from now.
For schools that cannot build fast enough, leasing or buying an existing building close to campus can solve the immediate problem. For example, a few years ago, to solve an acute need for beds, Purdue University entered master leases with existing properties proximate to campus. However, a potential issue is the fact that such a strategy can place colleges and universities against other student housing investors.
Transactions for student housing increased 79% in the first half of 2022, nearing all-time highs and pushing the sale price per unit nationally from $205,000 per unit in the first half of 2021 to $213,000 per unit in the first half of 2022, according to JLL. Additionally, cross-border increasingly targets the sector.
“Student housing has emerged from the pandemic as a highly sought-after alternative asset class that is attracting traditional investors as well as new entrants to the space,” said Teddy Leatherman, senior director of capital Markets for JLL. “The sector is seen as recession-proof, as every lease has a parental guarantee and people tend to go back to school during economic downturns. Additionally, student housing tends to trade at a premium compared to traditional multi-family so investors aren’t experiencing as much negative leverage.”
