A Lender’s View of the Student Housing Investment Market

Will Baker, Managing Director, Walker & Dunlop.
Image courtesy of Waker & Dunlop

In the past several years, student housing properties have performed relatively well, despite some major student housing markets experiencing a short-term impact on absorption due to oversupply. However, “as long as student enrollment grows in those markets and the housing supply is absorbed, they’ll be fine in the long run,” Walker & Dunlop Managing Director Will Baker told Multi-Housing News. 

In terms of investment, Baker thinks that tier 1 universities will continue to attract students, which will further draw both domestic and foreign investors. In an interview with MHN, he detailed the aspects borrowers need to take into account before investing in a student housing property and disclosed his predictions for the short-term future. 

How has the student housing investment landscape changed over the past several years?

Baker: The student housing market has seen substantial growth over the past few years. Both in the number of transactions being done, but also in terms of the size of the deals. Projects now are often in the range of 600-800 beds, whereas before, projects may have been 200-300 beds.

There’s also been an inward migration with a lot more urban infill projects being developed closer to campuses and at the expense of garden-style offerings further from campuses. Developers are looking for more efficient ways to hit their return goals and the density of the newer projects helps to increase the development yield. Fortunately for developers, students seem to like living close together.

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What do borrowers need to know in order to stay competitive?

Baker: One of the first things they need to know is how to manage tenant turnover in the summer, to gauge potential rent increases. They need to know how to capture student renters earlier in the process to avoid trying to fill their units until late summer and having to offer gift cards and other concessions to fill their properties.

Borrowers also need to have an intimate knowledge of the market they’re in and the student population they’re catering to, such as what amenities are going to attract them. Students present a completely different renter pool than traditional apartment renters and what’s attractive to students at one school won’t necessarily be the same at other schools. For example, students in State College, Pa., are not going to find as much value in the state-of-the-art pools that are so popular with students in Tucson, Ariz.

Beyond managing student preferences, borrowers need to be following enrollment trends at the school, who is building properties nearby that could potentially compete with their project and whether any nearby permits are being planned over the next three to four years. Being strategic and staying up to date within their specific markets will allow owners to stay competitive.

Many developers have been mixing students with non-student residents in properties close to universities. What are the challenges of this hybrid product for property managers?

Baker: These hybrid products present substantial challenges, but also opportunities for developers. The success of the project depends on the market and the type of non-student residents that are being targeted. The projects that have been most effective are often in urban environments and the ones that group students with recent grads or graduate students because the amenities they’re looking for are generally similar.

There are a lot of discussions about the trending co-living and micro-studios concepts. How do you see the supply and demand for these types of housing?

Baker: We haven’t seen a lot of demand yet, but I can see it becoming a bigger niche in coming years, especially in urban areas. It makes sense from a financial and lifestyle standpoint for a lot of people. Co-living is just suite-style living for conventional deals where the bedroom can be rented and the common area is shared—the model already exists and has been successful in the student housing world for years, so it’s really just a matter of applying this concept to conventional renters and their preferences. At a time when housing affordability is becoming such a major issue for so many people, co-living can be a great solution for people looking for accessibly priced living options.

How do you think the structure of the capital stack will change when it comes to student housing investment in the years ahead?

Baker: As far as capital stack, there are more equity checks going into new projects because of the current low cap rate environment. Owners and developers are also having to put more money into their projects because the low cap rates make it difficult for lenders to underwrite to 75 percent loan-to-value. Though borrowers like to have higher leverage than is available today, there are attractive trade-offs available. For instance, a borrower can actually get full-term interest-only loan at 65 percent loan-to-value, whereas at 75 percent, only four-five years would be most likely possible.

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Which markets do you see as the most promising for student housing investment and why?

Baker: Investment opportunities are always going to be best at larger, tier 1 schools—those with 20,000 or more students. These well-established state schools are going to continue to attract students. Because of their size, on-campus housing generally covers only a small segment of the student population, so you’ll see consistent market demand for housing. On the flip side, private schools with fewer students aren’t as attractive to developers, as they often require students to live on campus.

What can we expect from the student housing market going into 2020?

Baker: I think we can expect a slight decline in supply due to a number of factors, such as the cost of construction, less generous bank terms and the effect of potential tariffs. Also, some major student housing markets became oversupplied in a short time period, which hurt short-term occupancy levels in these markets. In some of these places you won’t see any building planned for two or three years to allow absorption to catch up with supply.

In terms of investment, I think we’ll continue to see more foreign equity coming into the space, it’s been a growing trend in student housing over the last four years and I think that will continue. Foreign international funds, sovereign wealth funds and pension funds from places like Singapore, Israel, South Korea and Canada have gotten into the market because of the strong fundamentals and demographic trends within student housing.