Student Housing: Shelter From the Storm
Why the sector may weather the coronavirus crisis better than most asset classes.
Student housing has not been immune to the coronavirus pandemic and the sweeping measures taken to mitigate its spread. Nearly all the nation’s colleges and universities have suspended in-person instruction, prompting many students living in off-campus communities to return home until classroom doors reopen.
But privately owned, off-campus residences may prove resilient in the face of economic shocks and shutdown orders. While many schools will struggle in a post-coronavirus environment, the enrollment growth trend favors public, four-year universities. The unpopularity of online learning with students and faculty members suggests that the in-person college experience is here to stay. And a new emphasis on social distancing could increase reliance on off-campus housing as a healthier alternative to crowded on-campus dorms.
The early signs are encouraging for several major student housing operators that revealed strong rent collection and pre-leasing figures in April. Some companies have also reported high physical occupancy in their off-campus communities, in contrast to the wave of sudden campus closures that forced dorm residents to pack their bags.
Jennifer Cassidy, executive vice president & COO of Austin, Texas-based student housing operator Campus Advantage, noted that the company’s rent collections at the end of April came to about 94 percent, compared to about 96 percent at the same time in March. “The industry as a whole is down about 2 percent,” she said, citing a weekly phone call with major operators.
Cassidy added that many of Campus Advantage’s properties are more than 50 percent occupied amid the crisis. “We fully expect that as the stay-at-home orders are lifted, we’ll see people returning to our properties,” she said.
Avi Lewittes, CIO of Chicago-based The Scion Group, said that the company had seen an average occupancy decline of less than 15 percent since mid-March as a result of COVID-19 and university closures—as well as students being on spring break—though physical occupancy trends vary somewhat by asset type and region.
“The ability to shelter in place in a safe and healthy environment is very different on- versus off-campus,” said Lewittes. “The living density of modern, purpose-built, amenitized student housing communities like ours is dramatically lower than that of communal dorms.”
Scion, which operates 86 communities with 58,200 beds in the U.S., achieved roughly 97.7 percent rent collections in April, after extending the month’s rent due date as a goodwill gesture—a better collection experience than conventional multifamily, Lewittes observed. By contrast, the National Multifamily Housing Council reported that 91.5 percent of apartment renters in the U.S. had paid full or partial rent as of the last week of April.
Lewittes added that as of late May, Scion’s overall portfolio was approximately 74 percent leased for the upcoming 2020/21 academic term, with the pace of leasing picking up again. “We are encouraged by all this momentum,” he said.
The decisive question facing the industry now is, when will U.S. campuses reopen? As of late May, the vast majority of the roughly 750 colleges tracked by The Chronicle of Higher Education have announced plans for an in-person fall semester. Many schools are still weighing their options in light of the medical situation and guidance from public authorities. California State University plans to kick off the fall 2020 academic year with online classes at its sprawling, 23-campus system.
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Universities are also considering starting the semester earlier or later than anticipated or trying out hybrid models of in-person and online instruction. Crucially, students, parents and faculty members alike seem to reject the idea that Zoom classes can substitute for the college experience.
“One theme that has emerged is the almost universal distaste for exclusively online learning,” said Christopher Merrill, co-founder & CEO of Harrison Street Real Estate Capital, which has tracked student feedback since the start of the pandemic. The Chicago-based firm, which invests in alternative real assets, has a portfolio of 80,000 beds in the U.S. and Europe.
“Students struggle with challenging concepts and collaboration, while professors are concerned with connecting with students and cheating,” Merrill added. “These issues may compound for less affluent students where many do not have a designated space to study or have larger responsibilities while at home.”
The prevailing uncertainty means that student enrollment is likely to be volatile in the near term, with selective universities positioned to benefit at the expense of less attractive schools. Flagship universities with international brand recognition and underlying enrollment of around 25,000 students or more are likely to continue to outpace public two-year universities and for-profit colleges in enrollment growth.
Total undergraduate enrollment in degree-granting postsecondary institutions in the U.S. grew by 26 percent between 2000 and 2018, from 13.2 million to 16.2 million students, and is projected to grow to 17 million students by 2029, according to the National Center for Education Statistics.
New deliveries for U.S. off-campus beds peaked at 62,000 in the fall of 2014 and hovered in the 43,000-48,000 range in subsequent years, according to data presented by RealPage Inc. Although oversupply has become a serious headache in some university markets, purpose-built student housing developers have generally reduced their pipelines in recent years.
The impact of COVID-19 may reinforce that slowdown, adding pandemic-related construction delays to existing constraints on development. Lewittes noted that current circumstances could help improve the supply-demand dynamic.
“The sector has already experienced reductions in new supply over the last 18 months due to escalations in land, labor and materials costs, which have compressed development returns,” he said. “Coupled with more restrictive construction loan terms, I think the pandemic will exacerbate that trend.”
Moreover, stock market volatility and a sustained ultra-low interest rate environment could support, and, over time, potentially drive up valuations in private commercial real estate, particularly in subsectors that are considered relatively safe. Institutional investors are taking note. “We expect there will be appetite to shift capital into alternative asset classes like ours,” Lewittes said.
On the demand side, the post-COVID-19 transition could also create new opportunities for student housing providers in serving thousands of students who may be effectively pushed off campus by efforts to mitigate density. For example, Merrill notes, a large Big Ten university has around 9,000 undergraduate on-campus beds, nearly all of them “double occupancy” in which students share a dorm room with one or more roommates.
If that university decides to eliminate all double occupancy in order to curb exposure to possible infections, 4,500 students would be compelled to seek other housing options.
“There’s been a lot of conversation concerning the fact that most on-campus student housing has purposely crammed students into very small spaces,” said CBRE Executive Vice President Jaclyn Fitts, who co-leads the firm’s National Student Housing team. “I think that we’ll actually see a decline in the amount of on-campus supply.”