As colleges and universities grappled with campus closures and re-openings, off-campus student housing—in some markets—defied expectations. The asset class nationwide has experienced a downturn, but savvy investors have nonetheless found opportunities.
Student housing has always been an asset classes with its own market dynamics, and the pandemic has underscored the distinct attributes of the sector. Rent collections and occupancy have remained fairly strong in some markets, in part, because some institutions closed their dormitories, leaving students to scramble for off-campus housing.
Meanwhile, some students preferred to remain in their housing even if their college or university had transitioned to online classes only, especially those who had prepaid off-campus rent or had parental guarantees. Also, some students committed to housing in hopes of their campus returning to normal sooner rather than later.
At the national level, the student housing sector as a whole is expected to continue to experience sluggishness for the remainder of the 2021-2022 school year. As vaccinations continue, uncertainty surrounding classroom strategies is creating unpredictability about student populations on and around university campuses.
Moody’s Analytics projects student housing vacancies will rise anywhere from 10 to 90 basis points, and rents will decline by 3.1 percent to 4.3 percent, depending on the type of property. That’s all the more reason lenders are likely to not size student housing loans to perfection but factor in some downside.
Preleasing for fall 2021 is currently trailing 2020 preleasing activity by 2.8 percent year-over-year, according to Yardi Matrix. Markets with public universities are driving preleasing activity, with schools such as the University of Hampshire-Main Campus, the University of Louisiana at Lafayette and the University of Georgia showing preleasing growth of 24 percent to 25 percent.
Ongoing discussions around many student housing properties reveal that the stronger properties are majority preleased, indicating that larger state university properties are coming back to pre-2020 levels much quicker and faring much better for the upcoming school year, compared to others.
Despite the headwinds, the sector has generally remained stronger than anyone expected. Investors are still pursuing student housing acquisitions and lenders are competing for the opportunities. One reason is that some institutions, like the University of Georgia and Purdue University, prepared quickly and early to keep their campuses open and active with such safety measures as widespread COVID-19 testing and social distancing.
Tier 1 markets
Demand for student housing is strongest around Tier 1 universities, which are known for the strong academic programs and membership in the “Power 5” football conferences. These schools enjoy strong admissions, and, therefore, resilient demand for on-campus and off-campus housing.
For example, in late 2020, Alliant closed on the $9 million refinancing of a 90-unit, 132-bed off-campus student housing property adjacent to a university in the Dallas-Fort Worth market. This particular property stands out in its immediate market because of its location and resort-style concept, offering high-quality construction, innovative design and best-in-market product features. Shared amenities include a pool and game room, and the property is also near abundant recreational, shopping, dining and nightlife venues.
In another example, at the University of Kansas in Lawrence, Kan., an investor recently acquired a 504-bed, on-campus dormitory-style student housing facility. Amenities include a 24-hour fitness center, a swimming pool with sun deck, a renovated lounge with games, 24-hour computer and printing access, free on-site tutoring, a community kitchen, an on-site laundry, on-site parking, and food service.
Meanwhile, the City Council of Bloomington, Ind., just approved construction of a 1,061-bed student housing development near Indiana University. When completed, it will be the largest such property the city has ever seen. Developer Landmark Properties plans to demolish the aging apartment building currently on the site and replace it with a more luxurious and modern facility.
While the Tier 1 university student housing markets have out-performed Tier 2 and Tier 3 cities, some investors have been finding value-add opportunities in the secondary and tertiary markets. When Capstone Real Estate Investments sold a portfolio of Tier 2 and Tier 3 properties in 2020, investor interest was reportedly robust.
Although some Tier 2 and 3 student housing markets have underperformed during the pandemic, hopes are high that fall 2021 will bring the bright beginning of stabilization as the vaccine rollout continues. The outlook for the 2022 to 2023 academic year is looking even brighter. Institutions with stable enrollment numbers are likely to present student housing investment opportunities as conditions improve and less-well-capitalized properties are marketed for sale.
With the worst of the COVID-19 pandemic behind us, demand for student housing will likely be most persistent around colleges and universities that most actively communicate with students about their classroom and campus strategies in the fall. Those that have remained quiet are making it very difficult for students and parents to commit to housing, which is one reason student housing preleasing is below historic levels.
Moving forward, however, investors with access to deep market insights who understand the dynamics of particular cities will be poised to seize the most promising opportunities. Lenders that see opportunities in this sector will continue to execute and close flexible loans on student housing properties.
Tim Madigan is a commercial mortgage originator at Alliant Credit Union.