Primarily propelled by rising enrollment figures and an expanding international student population, demand for student housing is surging. Both private and institutional investors—including multifamily firms new to the student housing arena—are exploring this sector due to its robust fundamentals and demonstrated resilience.
However, student housing has not been immune to the high interest rates and stricter lending criteria in the financial markets. Only $646 million in student housing transactions at Yardi 200 universities was recorded in the first half of the year, according to a Yardi Matrix report—down 73 percent since the same period in 2022. Although sales volume dropped significantly, the average sales price per bed only fell by a little over $3,000 from last year, to approximately $66,000 per bed, the same source shows.
“Until capital markets stabilize, I expect that we’ll see significantly reduced investment in student housing and all development for that matter, even though there is strong demand for this type of housing,” said Chris Carroll, senior vice president with BWE‘s Chicago office, in an interview with Multi-Housing News. Here’s what else he shared about student housing investment in an uncertain economic climate.
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Tell us more about how the current unstable interest rate environment is impacting student housing financing.
Carroll: It’s onerous. For example, I recently attended a real estate conference at the University of Wisconsin-Madison where we engaged in some discussions about student housing. The key takeaways: Enrollment is up, yet new housing projects have pretty much halted. Financing is quite expensive and donors want their names on shiny new projects, like libraries and science centers, rather than dormitory updates. In the current capital markets environment, development projects just aren’t economically viable.
How do you assess the risks associated with interest rate fluctuations when financing student housing investments?
Carroll: The uncertain economic environment has created a system where most institutional lenders will only consider deals at the biggest and most recognizable schools. For example, we recently financed a student housing community at Kennesaw State University in Georgia. Kennesaw State is not as well-known as the SEC or Big 10 schools, which made our execution a little more challenging.
I think, going forward, investors are going to have to adjust their mindset a little bit, which will present opportunities for smaller, more entrepreneurial owners who are willing to roll up their sleeves and do the hard work. There’s an entire country filled with college campuses in need of student housing development, and smart lenders and developers are starting to realize there are loads of opportunities there, especially as institutional sources of capital pull away.
Please talk about the main steps student housing investors should focus on to improve their chances of securing favorable financing terms today.
Carroll: Do your research. Make your own list of investment opportunities and invest in those areas. When rates are high, it helps to be willing to go off the beaten path.
When interest rates are at 7, many big investors won’t risk an investment with a 4.5 percent cap rate. This presents an opportunity for smaller buyers and investors to break in, and even for universities themselves to take a more active role in courting capital.
What strategies can student housing investors use to optimize their financing options? How much have these strategies changed in the past few years, especially compared to the pre-COVID-19 era?
Carroll: The strategies have changed. We’re advising our clients that they need an alternate capital plan in place from the start of every deal, at least for the next two to three years. The banks are reeling because interest rates have soared, and the Fed has instituted pressure on bank lending—I predict that pretty much every bank is going to have challenges with lending capacity at some point in the next two years. Smart investors really need to look to alternative sources of capital.
Historically, it’s been easy for clients to get somewhat complacent, returning to the same bank every time for financing. That’s just not feasible anymore. With that in mind, it’s a best practice to establish a relationship with a smart, experienced capital advisor. These advisors can bring access to capital, buying power, transactional experience and deep relationships that can truly enhance value.
In addition, a good advisor can help clients determine the best kinds of lenders to turn to in this market. Life insurance companies and pension funds can be great sources of capital, and Fannie Mae and Freddie Mac remain reliable options. Life companies tend to be cheapest and therefore the most desirable, followed by Fannie and Freddie. That said, if you want more leverage, a CMBS lender or a debt fund may be a better option.
Are there specific considerations or challenges in financing on-campus versus off-campus student housing investments?
Carroll: While different campuses have different dynamics, many lenders consider on-campus investments more desirable than those that are off-campus. That said, off-campus housing is typically financeable if the property has good access to campus transportation and if off-campus housing is customary at that particular university. All in all, on-campus housing generally performs better across the board and carries with it added confidence that new construction is less likely to undercut your rents or render you obsolete.
How does BWE approach financing for student housing assets that aim to provide affordable or low-income housing options?
Carroll: Good question. It’s important that students can afford to live respectably while at school, yet the structured affordability programs for this type of housing are underdeveloped compared to traditional rental housing. Student housing is a relatively immature asset class that doesn’t work the same way as traditional Fannie and Freddie affordable lending. This is because area median income restrictions don’t really make sense for students.
Ultimately, student housing affordability depends on location and the market, and most of the housing aid students receive is from loans and grants from the government and private lenders rather than from buildings with income restrictions. As the cost of college rises, we will be closely watching the intersection of affordable and student housing financing.
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To what extent do location and market demand for student housing affect the availability and terms of financing?
Carroll: In my estimation, the main factors at play here are the school’s reputation and overall attractiveness. Lenders tend to lean towards widely known quantities and investing in big name schools makes these decisions easier for them. There is a great deal of attention paid to a college campus’ level of demand, ease of transport, and the durability of student enrollment across both good and bad economic cycles.
What type of opportunities are there for joint ventures and international investors in the student housing sector today?
Carroll: Student housing is a very high-touch business and a specialized asset class. You can’t just turn the lights on and expect the development to perform well. You need a good manager and the right investors. We’re seeing a significant uptick in the number of international investors seeking joint ventures, which is a great way to secure equity capital. Match them with experienced operators with local or regional expertise and it’s a natural pairing that can pay big dividends for both sides.
Can you share some details about a success story related to a student housing financing deal facilitated by BWE?
Carroll: Earlier this year, we advised a good client on an important acquisition of a property at Indiana University. Their strategy consists of making strategic improvements to the property coupled with high-touch property management with the goal of realizing higher rents.
Over the past few years, IU has seen record-breaking enrollment, with over 10,000 freshmen starting in the fall of 2022. This, coupled with similarly robust graduate student numbers, revealed that Bloomington is a prime market for student housing investment. We worked closely with our client to secure the financing necessary to acquire and reposition the property. Even after planned renovations, the property is expected to have high-value rents compared to alternatives around campus, demonstrating that quality and affordability can go hand-in-hand in the student housing market.
