The student housing sector continued to prove its resiliency in 2022 as more students returned to campuses and resumed face-to-face classes following the health crisis. Rent growth remained robust, with 96.6 percent of beds at Yardi 200 academic institutions preleased as of September, according to the data provider’s latest research report.
Despite the high interest rate environment and increasing inflation taking their toll on the housing market, transaction activity in the student housing space also stayed elevated, while the pipeline for new supply continued to be strong. More than 31,000 bedrooms were under construction as of October at the top 10 U.S. universities for largest under-construction pipelines. The University of Texas in Austin led the way with 4,726 units, Yardi Matrix shows.
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Some of the major players in the market had a strong year in 2022, closing large deals and forming strategic partnerships to grow their student housing footprint. Landmark Properties teamed up with Abu Dhabi Investment Authority twice last year. First in March, when they decided to acquire and operate value-add student housing properties through a $1 billion platform, then in August when they joined forces again for a $2 billion build-to-core student-dedicated platform. Meanwhile, Blackstone added 166 new properties across 71 U.S. markets after buying American Campus Communities for $12.8 billion.
“Overall, inflation, rising interest rates and the resulting capital market disruptions have not done anyone in commercial real estate any favors, but we’ve still been able to get deals done due to the overwhelmingly strong fundamentals of the student housing space,” said Timothy Bradley, principal of TSB Realty. “The student housing sector’s positive supply-demand imbalance, along with its phenomenal past performance and recession-resilient track record has kept investor interest high and transaction volume steady,” he added.
But what’s ahead for the student housing market and how will the current economic dynamics impact the sector in 2023 and beyond?
Student housing in times of economic volatility
Despite the market uncertainty at the beginning of the year, the sector is still performing well, with rental rates continuing to grow.
“We have noticed student housing performance increased significantly over the past year in terms of preleasing velocity and rent growth. Students are renting at a much faster pace and higher rent than in previous years,” said Douglas Sitt, co-head of student housing at Rittenhouse Realty Advisors. “However, even though rent growth and asset performance are better than ever in this space, cap rates are much higher due to the interest rate increases,” he added.
Sitt pointed out that the increasing cost of debt began to impact the sector, slowing down both investment activity and the pace of new development. Bradley noticed that financing transactions above $300 million are harder to close, with many investors mainly focusing on deals below $100 million due to more liquidity in the financing markets.
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However, there were some exceptions in 2022. Vylla Title closed on a $389.8 million refinancing of a portfolio that includes student housing assets in Arizona, Nevada and Texas. At the beginning of the year, a joint venture of Adam America Real Estate, JW Capital Management and ARBS Real Estate USA Holdings secured $147 million in financing for the development of a 1,201-bed student housing project near Florida International University in Sweetwater, Fla.
Meanwhile, Vesper Holdings paid $203 million for Sol y Luna Apartments, a 972-bed student housing property in Tucson, Ariz. The deal marked one of the largest student housing purchases in history, according to Vesper.
The overall narrative for student housing is likely to continue to be positive this year. But Sitt and Ressler both highlighted the imbalance in enrollment by type of school, which poses challenges for Tier 2 and 3 universities as the larger academic institutions keep taking a sizable pool of enrollment.
“Highly selective universities with strong name recognition continue to get a flood of applications, while the opposite is true for less selective schools and community colleges,” Doug Ressler, manager of business intelligence with Yardi Matrix noticed.
Economic uncertainty is also causing difficulties for developers. Financing will continue to prove difficult for 2024, 2025 and perhaps even 2026 deliveries, according to Bradley.
“Overall new purpose-built student housing supply levels will settle in the 25,000 beds over the next few years, or about 60 percent of the typical annual volume,” said Bradley. “This level of supply cannot keep up with demand due to enrollment growth, shifting consumer demands and aging existing inventory, which is a positive indicator for continued outperformance in top-tier markets as well as future cap rate stability, if not compression,” he added.
For now, the development pipeline is still robust. Some major student housing projects were launched in the past years, including the second phase of Trinitas Ventures and Crawford Hoying’s The District at Clifton Heights, a 5-acre, $640 million mixed-use development in Cincinnati. This part of the project will include Branded Hub Cincinnati, a $250 million, 14-story, 1,112-bed student housing community.
What do students want?
Most industry experts agree that living in a space that fosters a sense of community is one of students’ main needs today.
“A dynamic sense of community is critical to success. Events and activities such as community gardens, study buddy programs, giving back to the community through volunteering and creating events and groups that impact change and drive the future of the environment are important to today’s students—a shift from typical pool parties, barbecues and pizza parties,” said Beth Pinder, COO of Campus Advantage.
Study spaces, outdoor areas, wellness centers, coffee bars and technology-driven features are also a must for students today, as opposed to pools, movie theatres and tanning areas that were in demand a few years ago, Pinder noticed.
“Amenities that benefit them directly are the most important to students now,” she said.
Principal Pat Bosch of architecture company Perkins & Will also noted that students now feel the need to gather, either for social or academic experiences. At the company’s recently completed student housing property Tamiami Hall at Florida International University, lounge areas overlooking the FIU Football stadium were created to encourage social gatherings. Perkins & Will also added professional kitchens in common areas, ample study spaces, as well as corporate-like conference rooms.
DLR Group Principal & Designer Jeanette Walton has noticed a shift in students’ preferences from resort-style amenities to spaces that offer wellness and privacy, and also support academic success. There is a rising demand for single bedrooms and private bathrooms on residence halls, with communal bathrooms declining in popularity. Another change is linked to the resurgence of communities popular in the 1970s, when students could eat, live and take classes in the same building.
Recently, DLR Group partnered with Core Spaces for a new student housing development at the University of California at Berkley, where they plan to incorporate a rooftop restaurant space and mixed-use street level retail, connecting the students to the community at large. In September, the two companies also teamed up for Hub Fullerton, a 1,047-bed development in Fullerton, Calif., adjacent to California State University at Fullerton.
Designers and architects are also working with the needs of Gen Z in mind. To cater to the youngest generation, Bosch said that “spaces are shifting toward shared experiences,” which means more outdoor spaces, natural light, common areas for recreation and studying, as well as green spaces.
Gen Z’s well-known interest in sustainability is also generating changes in the industry. DLR Group Global Higher Education Leader & Senior Principal Stu Rothenberger shared that educational institutions focused on implementing sustainable practices campus-wide will be well-positioned to serve the students of tomorrow. DLR Group is working on a carbon-neutral project for Swarthmore College in Swarthmore, Pa. The school’s new dining hall and community commons is slated to serve as a hub of activity and a cornerstone for social gathering on campus, all while highlighting reduced energy consumption and carbon footprint.
Looking forward in 2023 and beyond
Overall, experts expect a robust year ahead for student housing, considering the sector’s strong fundamentals in the past quarters.
“Impressed by the sector’s powerful performance, investors continue to flock to student housing. With about $3.9 billion in sales volume at Yardi 200 universities through September, transaction activity is approaching 2021’s record levels, although the average sales price per bed seems to be moderating,” Ressler noticed.
Student housing will continue to be attractive because it is not as competitive as multifamily and has high growth prospects, according to the Yardi Matrix expert.
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Bradley also anticipates that investor interest in the student housing space will remain high due to “record-breaking preleasing velocity already for the 2023-2024 academic year and fewer new deliveries projected annually from 2023-2025.” These tailwinds are likely to propel the sector to a similar preleasing success story for the 2024-2025 academic year, as well.
In terms of occupancy and rent growth for the upcoming year, Sitt expects to see a lot of activity in the student housing sector once investors realize the strength of this niche.
On a less positive note, banks’ limited lending capacity is bound to slow down new development financing deals, especially in the first quarter of this year, Bradley warned.
