One of the most resilient asset types in multifamily, student housing, has been going through multiple changes over the past few years, mainly due to the impact of the pandemic and the uncertainty surrounding capital markets. Students’ needs and wants have also evolved, with the younger generation now expecting their student housing community to provide a whole living experience that supports their academic path.
Therefore, investors and developers in the sector have been looking at different ways to create mixed-use projects that combine living and learning. Technology, a more hospitality-centric approach and sustainability have also become important aspects in the sector lately. Throuhout all these shifts, student housing remained strong, with the sector performing well despite distress in the capital markets.
LISTEN TO: Student Housing Unlocked—Trends and Shifts Driving Demand in 2024
“The student housing industry excelled amid both the 2008-2009 financial crisis and the COVID-19 pandemic, proving its resilience against various challenges,” said Casey Schaefer, CBRE’s co-leader of national student housing. “Student leases are backed by the strength of parental guarantors, which led to a higher collection rate during the pandemic than the greater multifamily sector achieved. With a muted development pipeline, student housing fundamentals are poised to continue thriving for years to come.”
Preleasing now stands at 47.3 percent for the 2024-2025 academic year, an uptick from 38.4 percent registered in December 2022, according to the latest Yardi Matrix report. Overall occupancy clocked in at 94.6 percent in 2023—slightly below the 2022 rate—but enrollment growth and new development are holding steady, supporting the sector’s strong fundamentals.
Trends in the student housing market
Despite its resilience, the student housing sector hasn’t been immune to rising interest rates, capital concerns and increasing construction costs. On the other hand, the need for flexibility and students’ growing expectations when it comes to sustainability and technology adoption, have also been influencing the sector’s performance, ultimately diversifying both investment and development approaches.
JLL Capital Markets Managing Director of Capital Markets Scott Clifton noticed that new players continue to enter the market, attracted by the sector’s healthy fundamentals and robust bid sheets on marketed deals. More foreign investors and private capital have entered in the sector, with these two groups accounting in 2023 for 27 percent and 48 percent of the buyers’ pool, respectively, an increase from only 5 percent and 33 percent in 2022.
“Institutional investors went from 18 percent of the seller volume in 2022 to 45 percent in 2023,” Clifton added.
Meanwhile, economic volatility and capital markets unpredictability are pushing an increasing number of investors to approach investments with loan assumptions, a trend that is gaining traction in the current environment.
“In-place loans provide buyers surety and are generally more accretive than new financing, even if they are amortizing,” William Vonderfecht, CBRE’s co-leader of national student housing, explained. “The asset on which we received the most offers last year was offered with an assumable amortizing agency loan. There is ample capital pursuing student housing assets but investors are underwriting assets under a microscope today.”
On the completions side, there’s a substantial decrease in activity, despite occupancy and rent growth fundamentals holding steady.
“With new deliveries down dramatically—the average number of new beds delivered in 2021, 2022 and 2023 was 33,700, while the preceding seven years saw 56,200 beds per year on average delivered—the expectation is that occupancy and rent growth will continue to be strong,” Clifton said, predicting an almost 8 percent rent growth for the upcoming academic year.
READ ALSO: Why Student Housing Investors Need to Go Off the Beaten Track
Is the sector really recession-proof?
It’s no secret that the student housing sector’s performance has been shadowed by economic fluctuations. High inflation and interest rates, coupled with a looming recession, have been making it extremely difficult for industry players to close deals. Schaefer believes that the most significant challenge over the past 18 months was the rapid changes in the capital markets landscape.
“Procuring offers or term sheets is generally not a challenge, but owners continue to struggle to have confidence in market pricing,” Schaefer said. “With fewer data points from other transactions and continued uncertainty on the future of interest rates, many owners point to the incredible fundamentals of the sector as a reason to hold their assets.”
Furthermore, Vonderfecht believes that student housing is an asset class that even if interest rates remain elevated for another 12 months, the value of assets will increase due to the strong rental growth.
“Other asset classes are seeing flat or even declining rent growth that can’t keep pace with their increasing expense burden,” he noted.
Despite also being confident in the sector’s resilience in the face of economic turbulence, Doug Ressler, business intelligence manager at Yardi Matrix, points out the supply and demand imbalance that is creating difficulties for investors, particularly when it comes to affordable and good-quality units. He believes that the construction pipeline is insufficient in Tier 1 and 2 markets where there is a growing student population.
“This creates opportunities for developers and investors to enter or expand the market but also poses challenges in terms of site selection, land acquisition, zoning and entitlements,” Ressler added.
With financing still expensive, it is challenging for new and small investors to enter the sector, with affordability remaining a top concern for both investors and students. Operators need to find flexible financing strategies such as partnerships and equity raises, and optimize their operational efficiency while also adding services and amenities that attract young renters.
READ ALSO: Enhancing the Student Housing Experience—Inside Campus Apartments’ Strategy
Meanwhile, the lack of competitive financing options has been just one of developers’ problems. Rising labor and materials costs, along with regulatory changes, have also been slowing down new projects. Developers are finding it difficult to strike the right balance between building high quality projects that adhere to current standards and finding capital to support those initiatives.
One of the most active players in the student housing market, Landmark Properties, delivered more than $2 billion worth of properties for the 2023-2024 academic year, totaling 8,195 beds. The company’s Executive Managing Director of Development Jason Doornbos believes that their long-standing equity and lender relationships allowed them to continue to deliver new projects in this challenging economic environment. The development company also has an in-house construction arm.
“These operating fundamentals have acted as a mitigation to the impact of rising construction costs,.” Doornbos said. “Landmark’s vertical integration is an advantage in this environment as we have more control over the lifecycle of our projects than our competitors.”
Where does student housing perform best?
Despite all the challenges out there, other major players in the field also managed to pencil deals, kick off or deliver new projects in 2023, particularly in high-demand areas near flagship universities. Clifton and Ressler agreed that some of the most sought-after markets in the U.S. were Madison, Wis., Phoenix and Tempe, Ariz., Knoxville, Tenn., Athens, Ga., and Ann Arbor, Mich. In these markets, high enrollment numbers, the supply-demand dynamic, proximity to campus, as well as the multitude of property amenities, are all influencing the sector’s growth.
Among the largest deals that closed last year was Global Student Accommodation and Morgan Stanley Real Estate Investing securing $550 million to finance two-thirds of GSA’s student portfolio in the U.S. Another notable deal was the $233.3 million construction loan obtained by Core Spaces, Schenk Realty and Kayne Anderson Realty for Hub Knoxville, a 2,000-unit student housing project that is supposedly the largest student housing development in the city.
Meanwhile, UC San Diego approved the $537 million Ridge Walk North Living and Learning Neighborhood, planning to add 5,700 beds to its campus by 2025. The University of South Carolina completed Campus Village, a $240 million on-campus project totaling 1,800 beds, and in Davis, Calif., The Michaels Organization opened Orchard Park Residence Hall, a 1,549-bed community developed through a public-private partnership.
READ ALSO: Vesper’s Founders on Strengths, Weaknesses in Student Housing
Landmark Properties delivered 10 new communities last year, “the largest single-year off-campus portfolio in the sector’s history,” according to Doornbos. The company completed The Standard at Seattle, a 1,545-bed community adjacent to the University of Washington campus, one of its largest projects. Additionally, Landmark kicked of a 1,500-bed property near University of Southern California in Los Angeles and topped out Standard at Philadelphia, a 802-bed community near the University of Pennsylvania.
“In 2024, Landmark will deliver student projects in Tallahassee and Tampa, Fla., and a project in Eugene, Ore., and will be under construction on 14 other student projects that will deliver in 2025 or 2026,” Doornbos revealed.
Another active investor in the sector, Toll Brothers, has been targeting opportunities in markets with strong fundamentals near Tier 1 universities with growing demographic trends and diverse economic drivers. The company completed Lapis, a 1,086-bed student community in Miami, next to Florida International University, and partnered with The Davis Cos. to develop Aperture, a 680-bed project in Orlando, Fla., scheduled for completion in 2025.
Richard Keyser, vice president for Toll Brothers Campus Living, told Multi-Housing News that students still expect their communities to have fitness centers and high-speed internet, but the amenity package must also include spaces that encourage social interactions and discovery. Mental health and wellbeing have also become very important for students, so an increasing number of student housing developers have been taking these aspects into account when developing their projects.
What’s next?
Current sector dynamics and evolution in the capital markets arena are forcing investors to adapt and find solutions to counteract both lingering issues and other potential challenges on the horizon. Positive aspects such as good enrollment numbers and occupancy growth, paired with rent increases, are contributing to industry players’ optimism.
“Student housing has been and will continue to be a recession-resilient asset class as a larger percentage of the college-age population tends to go to school for both undergraduate and graduate programs when attractive job options are scarcer,” said Clifton.
Doornbos believes that operators with less dependence on recycled capital will perform better in 2024. Ressler anticipates higher transaction activity in the market going forward, as investors and developers seek to capitalize on the attractive returns and stable cash flows of the student housing sector. However, they should carefully monitor local market conditions and assess a property’s specific characteristics before making any decisions, he warned.
