Measuring Student Housing Investment Fundamentals
- Sep 24, 2020
Commercial real estate watchers have been especially interested in the effects of COVID-19 on the student housing business. As the fall semester drew nearer, real estate investors hoped that higher education would indeed welcome students back to campus for in-person learning, and most have. But even when the worst fear materialized—a return to online learning due to continued outbreaks—the student housing sector showed resilience.
Instead of moving back home, these students who are now following online classes are leasing apartments at off-campus purpose-built student housing properties. What was once the domain of upperclassmen has become the choice for college students of all ages.
“It seems that universities will likely be lowering (housing) capacity for a number of years from here on out and change the way they have been housing students,” said J. Ryan Lang, vice chairman & head of Newmark Knight Frank’s Student Housing division. Lang is seeing capacity lowered more than 70 percent at universities across the country.
Fortunately, he noted, most of the purpose-built off-campus housing developed in the last decade is working well during the pandemic because it already features en suite bathrooms, full bed-to-bath parity and community spaces for social distancing.
For these reasons and others, the negative headlines about student housing investment don’t necessarily mesh with the facts on the ground regarding enrollment numbers and how the industry has performed from an occupancy, rental rate growth or collection standpoint.“You’ve got roughly 1.1 million international students who go to school each year in the States; 90 percent of those students that study here stayed during the pandemic and went back to school in the fall,” Lang said.
Naturally, the big concern was more specific to the roughly 250,000 students that come to the country each year for freshmen international enrollment. “From a logistical standpoint, that’s clearly going to be tougher—and we’re going to see that there’s been a drop on that front—but the good news is that we think it’s likely the 250,000 number will be offset by the roughly 300-350,000 American students who typically study abroad each year,” Lang added.
Flight to quality
Investors are bullish on student housing investment and for good reason: This defensive asset class has performed better than most asset classes during the pandemic. NKF’s 2020 Student Housing Mid-Year Market Overview reports sustained collections north of 97 or 98 percent, depending on the market and, across Tier 2 universities, it has been around 98 percent or above.
NKF research also reveals some of the effects of COVID-19. Predominately driven by transactions in the first two months of 2020, the student housing sector has seen $1.58 billion in investment activity through the first half of the year—a sharp decline compared to the $2.29 billion transacted through the same period in 2019.
But NKF’s report also states that, despite a slowdown in investment activity due to the pandemic, “cap rates have sustained near-record lows as sophisticated institutional, domestic and international capital sources seek scalable portfolios and quality one-off acquisitions through a flight to quality.”
And institutional sellers lead with more than $853 million sold through the second quarter of 2020. This accounts for nearly 56.5 percent of total market share. According to NKF, it’s a sizable increase from 2019, when institutional capital accounted for just $28.4 million of total dispositions through the first half of 2019.
High risk, high yield
The student housing business is currently experiencing a series of cross currents, according to Jeff Adler, vice president for Yardi Matrix.
“You have de-densification of the dorms. You have some questions about who’s coming and who actually showed up. The pre-leasing trends actually have looked pretty good, but there is a wide variance across schools. And what’s interesting is not all schools that went online failed to lease up and not all schools that are in-person actually do lease up,” Adler told Multi-Housing News.
There is a demand-supply balance at each one of these schools in terms of new supply and there is a tremendous amount of variety in terms of overall performance.
According to Adler, distressed opportunities are scarce. Institutional investor interest remains high and the fundamental decisions about which schools they want to invest in haven’t changed: It’s the states with good population growth, good demographic inflows and good fiscal balances.
“The student housing sector, because it’s the equivalent of a cruise ship—it leases up and then it sets sale at a certain date—is seen as higher risk,” Adler noted. “And that’s why it is more operationally intense than other multifamily sectors, but that’s also why the yield tends to be higher and compensates for that.”
A dynamic sector
Operators looking for joint ventures to do on-campus housing could be in luck. More construction activity may be required because the legacy housing of the universities will not work as much as was thought. “Sometimes when you approach the student housing sector, things that seem negative oddly end up being very positive for the sector because of the need for capital investment and a need for a re-imagination of how students are housed,” Adler said, adding that student housing is “a dynamic sector.”
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Certainly, the strong value proposition of a college degree remains intact and the increased adoption potential of online-only and hybrid courses may actually increase enrollment at public universities with growth mandates. “This combination should continue to drive demand for off-campus accommodations,” James Jago, principal at Pebb Capital, told MHN.
In the short-term, Jago expects demand to shift to lower-density unit mixes as students will be spending significantly more time in their housing than any previous semester. “Longer term, we expect developers will continue to innovate with efficiently designed units comprised of modular components and flexible furniture, furnishings and equipment to try to make the pro forma pencil with a lower bed-to-unit ratio,” Jago said.
The current pipeline under construction or already capitalized will likely deliver, but deals in the earlier planning phases should abate, providing potential buying opportunities.
“Despite the inevitable hiccups a global pandemic causes and the resulting negative headlines, the sector has been exhibiting the resiliency that student housing investors covet, with occupancies and collections generally remaining strong during the summer and into the current academic year,” Jago noted. There are many reasons to be optimistic about the student housing sector as the fundamentals remain strong for many university markets.