A Closer Look at Student Housing Investment

(Clockwise from top left) Doug Kligman, Frederick Pierce, Jason Schwarts, Ryan Lang, Justin Gronlie, Doug Opalka.

The student housing sector has proven resilient in the face of crisis, with Tier 1 markets continuing to lure investors and foreign capital cushioning a drop in deal volume.

That’s the takeaway from a panel moderated by Doug Opalka, senior managing director at JLL Capital Markets, during the third day of the virtual National Multifamily Housing Council and InterFace Student Housing Conference.

The speakers—Frederick Pierce, president & CEO at Pierce Education Properties; Justin Gronlie, director at Harrison Street; Jason Schwartz, managing principal at Blue Vista Capital Management LLC; Doug Kligman, chief investment officer at Vesper Holdings; and Ryan Lang, vice chairman and head of Newmark’s student housing multifamily capital markets division—all agreed that investment volume dwindled to some extent in the past six months, but transactions continued to be completed in various markets.

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NKF, for instance, has closed 11 deals valued at nearly $500 million during the pandemic, and another $1 billion worth of product is currently under contract, with deals expected to close by the end of 2020 and in the first quarter of 2021.

“We’ve seen a lot of activity (…) We’ve seen cap rates (…) if not at the same level, maybe inside what they were pre-COVID-19,” said Ryan Lang. “There’s certainly an abundance of capital, typically coming from overseas,” he added, noting that approximately 38 percent of total investment volume came from foreign capital during the second quarter and the trend is expected to continue over the next 12 months.

The ability to hold pricing became a key focus for industry players during the COVID-19. According to Schwartz, Blue Vista’s deals have closed at approximately 1 percent lower than before the pandemic.

Moving forward

More than six months into the coronavirus-induced crisis, investors are looking at ways to bring their student housing businesses back to operating at full steam for the fourth quarter and into 2021.

Overall, the student housing sector has performed much better than expected. And most investors are now looking at Tier 1 universities and colleges, where there is greater diversity and more demand for student housing product as those schools are expected to continue to grow over time.

“There is a lot of capital out there that, because of the pandemic, was expecting to find distress,” said Pierce. But there is no distress in student housing when it comes to Power 5 football conference schools. Sellers, moreover, were not willing to take higher cap rates in those markets than pre-COVID-19, while buyers were expecting to see some discounts. While transactions will continue through the final quarter of 2020 and onward, the market is still far from returning to a normal volume of deals.

Pierce also noted that enrollment in Tier 1 and Power 5 football conference schools remained high, which allowed for the student housing sector to continue to perform during the pandemic. And this flight-to-quality trend, in both assets and markets, is going to be more pronounced after the pandemic subsides, as very few buyers will be willing to go out of the box and invest in Tier 2 and 3 properties, according to Lang. 

Fundraising optimism

When it comes to raising capital, things are better than expected because investors are excited about the prospects of a new, post-pandemic student housing fund, according to Gronlie. In addition, there is an increase in capital allocation for “all things living”—meaning student housing, multifamily, senior housing and even co-living, Opalka explained. Interestingly, Pierce noted, there has been a broadening and diversification of the investor profile since the outbreak.

Apart from domestic investors, the student housing market has attracted more and more interest from international sources—particularly from Southeast Asia—and even family offices or ultra-high-net-worth individuals that act as direct investors and call their own shots.