Why Capital Is Gravitating Toward Student Housing
- Sep 30, 2021
Despite school closures and uncertainties around reopening, the student housing sector remains on solid ground. Off-campus occupancies only fell 3 percent during the 2020-21 academic year and have since then recovered to pre-pandemic levels, according to Fred Pierce, president & CEO of Pierce Education Properties.
Founded in 1995, the San Diego-based company currently owns and manages a 12,500-bed off-campus student housing portfolio. The company focuses on core, core-plus and value-add communities at Power Five football conference universities, where enrollments continue to be high even in the face of a health crisis.
In the interview below, Pierce spoke about COVID-19’s impact, the current state of the industry and why student housing continues to be an attractive sector to invest in.
What surprised you about the student housing sector in the wake of the crisis?
Pierce: What may have surprised the investment community is that the method of course delivery, ranging from substantially in-person to hybrid to substantially online, had no material impact on off-campus occupancies in the vast majority of markets.
How do you see the student housing industry now, more than 18 months into the pandemic?
Pierce: The student housing sector has performed second only to industrial during the pandemic. Concerns about university course delivery methods and the closing of on-campus residence halls, if anything, had either no impact or a positive impact on the off-campus student housing sector during the pandemic.
Debt and equity capital for new acquisitions and development initially seized-up in the second and third quarters of 2020 but began flowing again with fourth quarter investment sales of approximately $2.5 billion, reaching the third-highest fourth-quarter volume in the last six years. Capital is flowing into the sector in 2021 at historic levels. As multifamily cap rates have compressed into the 3s and even high 2s, student housing remains comparatively cheaper.
How has the pandemic impacted on-campus vs. off-campus student housing communities?
Pierce: On-campus student housing has been dramatically impacted during the pandemic. In spring 2020, virtually all universities closed their residence halls starting in April and sent their students home for the balance of the academic year, while providing ratable rebates of housing fees.
In response to social distancing protocols, the typical university de-densified its on-campus housing for the academic year of 2020-21 by somewhere between 20 percent and 50 percent—representing a similar loss of housing revenues. Most universities have increased on-campus housing occupancies for the current academic year, but not yet to pre-COVID-19 levels. On-campus occupancy is expected to reach pre-pandemic levels during the 2022-23 academic year.
Conversely, off-campus student housing occupancies were down only 3 percent for 2020-21 academic year, according to College House, and are back to above pre-COVID-19 levels for the current year. The fall 2021 freshman class is widely projected to be the largest in more than a decade. In our portfolio, we achieved the highest occupancy of all time during this fall semester, with most of our properties at 100 percent occupancy with waiting lists.
How does student housing currently look at the beginning of the new academic year?
Pierce: With fall move-ins having just been completed, occupancies in off-campus student housing are the highest in a very long time. Most schools have returned to primarily in-person instruction, and the kids are back at college. The freshman class is extra-large, as most college-bound high school seniors went off to school, and most of the 9.5 percent decline in the fall 2020 freshman class has matriculated to college this year. The strongest markets are at the Power Five football conference universities where applications continue at all-time highs.
Why is it a good idea to invest in student housing during these uncertain times?
Pierce: Investor interest is again peaking in student housing. It is an asset class that prospers during economic growth and even more so during recessions and down cycles. The pandemic proved the sector’s recession-resistant characteristics once again.
The sector’s strong performance as compared to multifamily during the pandemic has also resulted in more capital gravitating to student housing. Most investors really like “habitational” real estate and have realized that a smart real estate portfolio asset allocation strategy includes a meaningful distribution of the residential allocation toward student housing, where cap rates are measurably higher than in multifamily.
What are the biggest challenges in the student housing financing landscape?
Pierce: Until just recently, the Agencies—FNMA and FHLMC—had imposed new COVID-19 reserves to their student housing loan underwriting criteria. This was resulting in around 10 percent of loan amounts being set aside for 18 months in COVID-19 reserves. This policy was implemented in summer 2020 when the fall university and student housing outlook was uncertain.
Now that student housing occupancies, revenues and collections have proven very strong during the pandemic, the agencies have only recently rescinded those additional reserve requirements. In addition, banks and debt funds had stepped in to fill the agency voids, such that those sources are temporarily more cost-effective than Agency loans. We don’t expect that to last, as we expect the agencies to start getting much more competitive with rates. The debt markets are now strong and plentiful for experienced student housing operators.
How was supply impacted during the pandemic?
Projects that had procured financing commitments prior to the pandemic largely proceeded during the pandemic, but the volume of new construction did slow meaningfully in terms of new starts that had not procured financing pre-pandemic.
How do you expect the new supply to impact the sector in the short and long term?
For the foreseeable future, debt and equity is being much more selective in terms of development project markets and sponsorship. Seasoned student housing developers in strong markets will continue to receive financing for new construction, but others will not.
What are some of the risks and challenges you are concerned about when it comes to student housing?
Pierce: Student housing, like any other kind of commercial real estate, is not immune to overdevelopment. What is key is to be at universities where enrollment demand remains very strong and where there are reasonable barriers to entry.
During the 2000s, when national higher education enrollments increased by 38 percent, student housing prospered mostly at all universities. Today, just like other sectors of commercial real estate, market/university selection is imperative.
Our company seeks investments/developments at Power Five football conference universities, where enrollment demand continues at incredibly high levels. We also pursue opportunities at the Group-of-Five football conference universities when located in major metro areas, where the underlying real estate market fundamentals strengthen the markets.
What trends do you expect to shape student housing in the remainder of 2021 and beyond?
Pierce: We don’t foresee that online learning will be a disruptor to enrollment at residential universities—students want to be at school and not online. And we foresee the return of international students to U.S. universities, particularly starting in fall 2022.