The New Student Housing Finance Textbook
Despite strong demand, it's been a challenging year on the capital side, writes CRG's Struan Robertson.
Student housing remains one of the most attractive and in-favor asset classes in commercial real estate, but it’s no “easy A” for developers and investors. The market has changed dramatically since I started in multifamily and student housing development more than a decade ago, particularly in how developers finance and manage costs for student housing projects.
As I write this, my firm’s Chapter Madison, a newly opened 534-bed student housing community near the University of Wisconsin-Madison, is 100 percent occupied. There’s been a mini student housing boom in that city as the university looks to top 50,000 students on campus for the second year in a row. After years of little new supply, almost 3,000 new beds were delivered this year, and more than 4,000 are planned for the coming years. This supply story is not limited to Madison. Nationally, 46,000 new beds are expected to come online this year, according to Yardi Matrix data, although the new supply is concentrated in fewer markets, some of which are experiencing tremendous growth. My firm also is completing Chapter Eugene, a 302-bed project near the University of Oregon, and is in the early stages of breaking ground for our second student housing project in Madison.
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But when you look behind the curtain, those of us who underwrite and secure financing for multifamily and student housing developments have faced still-high interest rates and, with that, both unpredictable capitalization rates and valuations, and supply that tends to come in waves—all of which can make it challenging to project rents and hit the desired return thresholds of our investment partners. Despite high demand in many markets around the country, it is still very difficult to get capital and keep projects on track through predevelopment phases. Right now, you almost need an advanced course in the art of funding student housing. Call it “Financing 201,” a must for student housing developers navigating current market conditions.
Those who study this subject will learn:
Demand is uneven. Some colleges and universities are struggling with enrollments, and housing demand is down in those towns and cities. But the need is great where enrollments are growing, with 15 to 20 markets across the country especially hot, including Madison; Austin, Texas; Ann Arbor, Mich.; and Knoxville, Tenn. Developers need to understand where and how to develop student housing market by market, even submarket by submarket, and justify the development based on demonstrated demand. Despite the addition of new supply in these markets, we are seeing enrollment gains outpacing new beds, allowing absorption and fundamentals to remain strong.
Banks are funding fewer projects. Even in undersupplied markets, banks are making fewer construction loans and scrutinizing projects more closely than ever. Because our team has decades of experience in multifamily and student housing development, overseeing more than $6 billion in projects to date, that’s been an easier hurdle for us to overcome. But in many cases, developers are having to put more equity into deals and looking to nonbank lenders to secure the construction financing for these projects.
Costs are a moving target. For a while in 2023, construction and labor costs were increasing by up to 40 percent from a year earlier. This year, pricing has moderated, but developers still need to watch for cost overruns and be prepared to pivot mid-project, for example, by using alternative materials or construction methods. Our sister company Clayco is our general contractor on many projects, giving us added transparency and flexibility to make needed changes when problems arise. In smaller markets where many of our target universities are located, just a few off-campus projects are enough to keep the market busy and continue to put pressure on costs, whereas in larger and more urban markets, we are seeing some relief in pricing as those markets see less construction activity than normal.
Rents are rising, and that’s not necessarily always good news. Today’s students want housing that is both amenitized and affordable. To achieve this, developers must balance flash with function when deciding what types of offerings to include. Although we have seen some moderation in rent growth year over year, students are still facing historically high rent growth in addition to paying more for everyday essentials and often also facing student loans. Strategies being employed to cater to cost-conscious renters include adding density, being more selective with amenity offerings and evaluating shared bedrooms in more markets.
Student tastes are shifting. Lately, students are prioritizing communal spaces where they can gather, and they care more about sustainability and integration with the property’s neighborhood. At Chapter Madison, for example, the design by architect Lamar Johnson Collaborative takes the city’s Regent Street Plan and South Campus neighborhood into consideration, with first-floor public art honoring the history of the site’s Greenbush neighborhood.
Investors have taken notice. Purpose-built student housing used to be more of a niche asset class, but institutional investors continue to pour capital into the sector, accounting for 45 percent of sales in 2023 versus 18 percent in 2022, according to JLL. This provides developers with an attractive potential exit while also offering the possibility of more potential capital partners in the future.
With interest rates in flux and inflation improving but still stubbornly high, now more than ever, student housing developers need to understand the opportunities and risks they face when looking to pursue new deals, even in high-demand markets. Those that do are best positioned to ace this course and move on to the next semester.
Robertson leads financing and underwriting for CRG’s multifamily projects across the country, including student housing. Prior to CRG, he was with CA Ventures, working on a team that completed more than 50 student housing developments across the country before moving together to CRG.
