Jim Tatum
The student housing market is red-hot and those in the know say the sizzle is not done yet. According to Yardi Matrix, student housing had its best year on record in 2022, with some 48% of beds in 200 schools tracked by Yardi already leased for fall 2023. Even though climbing interest rates have cooled other sectors of the multifamily market — which remains solid overall — student housing is not only largely unaffected, but typically does better during times of economic volatility.
Investors, impressed by the sector’s strong performance, are increasingly attracted to student housing. The sector 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. In 2022, student housing sales across the U.S. came in at 470 properties sold for a total of $22.8B, with an average price per unit of $260K, average price per bed of $100K and an average cap rate at 4.87%.
Greystone and others say that pre-leasing levels and year-over-year rent growth are good indicators that operating fundamentals should remain solid in 2023. Enrollment trends at Tier 1 universities remain strong and supply pipelines are down, making for robust market conditions. Indeed, Greystone is seeing a mix of institutional and private capital, with an increase in institutional capital due to companies such as Brookfield, Blackstone and Morgan Stanley entering the sector.
JLL points out that, not only is student housing becoming a more sought-after investment in the U.S. — attracting an increasing number of investors new to this segment of the multifamily market — but there is a substantial increase in foreign investment, especially from areas such as the Middle East and Singapore. Indeed, student housing — particularly U.S. student housing — is widely considered to be a very solid investment by many investors abroad. Berkadia reported that this year institutional investors reclaimed the largest share of the student market, bolstered in large part by Blackstone’s acquisition of American Campus Communities Inc. in 2022. The portfolio of 166 properties across the U.S. was acquired for $12.8B and accounts for most of the 62% institutional investor share in 2022. And companies such as TSB Realty note that the sector’s red-hot past performance, solid recession-resistant fundamentals, and current supply shortage will continue to attract and drive investor interest.
According to the National Multifamily Housing Council (NMHC), enrollment in undergraduate public four‐year universities alone — the largest source of institutional student housing demand — is expected to increase by 1.1 million new students, while another 400,000 students are expected to enroll in graduate programs by 2031.
The hottest markets are going to be associated with highly selective schools with name recognition; schools that struggled during the pandemic may close or consolidate. Companies such as Landmark Properties have pointed out that publicly chartered four-year state institutions and large private schools with sizeable endowments and enrollments have significantly outperformed smaller colleges and universities that are experiencing enrollment challenges. Many universities have budget holes to fill due to their financial losses during the pandemic, so they increased their acceptance rates modestly and are experiencing record enrollment.
Amenities can be a significant factor to drive demand and absorption. A few years ago, the trend seemed to move toward amenity-rich housing communities. However, students today seem to prioritize the functional over the luxurious. According to JLL, the most important amenity in student housing today appears to be open spaces such as study areas, exercise spaces and smaller social places. According to a studenthousingbusiness.com survey, students placed more value on amenities such as Wi-Fi, laundry, utilities, dishwashers, parking over pools, fitness centers and hot tubs. Also, expensive and amenity-rich housing has been identified as one factor that contributes to higher vacancy rates in newer developments, according to a 2020 NMHC report.
Construction costs and high interest rates have slowed the new product pipeline. Interest rates have made capitalization of new projects more difficult, although that varies from market to market. Capital is available, but the cost of debt and equity has increased. Construction financing, especially, is much more difficult to obtain, however, should ease with time. New product for Yardi 200 universities — including planned, prospective and under-construction properties — decreased by more than 3,000 bedrooms from December to January, representing a 2.6% contraction. As of Jan. 8, RealPage was tracking 149 purpose-built student housing properties in all phases of construction, which represents some 83,967 beds. The largest share of properties in the pipeline is in the Southeast region, where 51 properties representing 27,077 beds are located.
Despite market variations and economic headwinds, both preleasing activity and rent growth saw strong gains. According to Yardi, as of December some 48% of beds at Yardi 200 universities had been leased for the 2023 year, and about a third of those schools had more than 50% of available rooms pre-leased. Rent growth in the Yardi 200 universities was at 4.7% as of December, the highest growth rate for any December on record; average rents were around $800 a month. Rent growth peaked at 5.2% in June 2022 and stayed between 4.5% and 5% each month since.
RealPage says that while the next one to three years look to be solid for student housing, there are unknown factors that could affect the market longer term. One potentially significant factor is that the 18- to 24-year-old cohort (Gen Z) is not going to be as large as it was when the millennial generation was entering the college-age years, in the early 2000s and 2010s. Therefore, the population of the Gen Z cohort, coupled with the number of individuals who will be interested in attending college — the costs of which also continue to rise — could be the source of a new and potentially challenging headwind.
Ultimately, most of those in the know say that, while transaction activity will likely be lower in 2023 than it was in 2022, that should rebound in 2024. Rent growth should return to more moderate/normal levels in 2023, but, overall, student housing market fundamentals should remain strong for the next few years.
