Why Student Housing Is Earning High Marks From Developers
Experts weigh in on the demographics, demand and capital markets issues shaping their strategies.
With the pandemic moving into rear view, the student housing market is quickly regaining any momentum it may have lost in the past two years. The sector’s resilience is fueling steady development, sustaining rent growth and attracting interest from new entrants.
“We’re seeing a need for well-located, purpose-built housing after the pandemic,” said Wes Rogers, president & CEO of Landmark Properties. Landmark recently broke ground on its third student housing project near the University of Southern California. That development will deliver more than 1,500 beds in fall 2026. And in Philadelphia, the firm’s second student community near the University of Pennsylvania is underway, expected to open in fall 2025 with 909 beds.
Among this year’s other marquee new projects are MDL Group’s 30-story tower near the University of Texas’ Austin campus and a $537 million development at the University of California, San Diego, which is scheduled to break ground this summer.
Private and institutional capital—including multifamily companies new to student housing—are entering the field because of its strong fundamentals and resilience. “Our bid sheets are as long as they’ve been historically,” reported Casey Schaefer, senior vice president & co-leader of CBRE’s national student housing team. CBRE has closed on 12 assets so far this year and has 14 more currently under contract. According to a 2023 student housing study from Berkadia, transaction volume totaled $22.8 billion last year for an average of $100,000 per bed.
Enrollment on a roll
While enrollment is still down compared to pre-pandemic figures, the National Center for Education Statistics projects that undergraduate enrollment will increase by 8 percent for the 2020-2030 period to 17.1 million students. Also of note, more students are heading to public and Tier 1 universities and large private schools.
“We saw a bifurcation of markets, between Tier 1 markets and the regions with smaller colleges and universities,” said Rogers, adding, “We’ve had success in markets with private universities with a significant off-campus population.” Although finding sites and getting deals to pencil can be a challenge, these markets offer stable cash flow for quality and well-located assets.
The data bears out that observation. At many flagship schools, 2023 enrollment and leasing rates have been high, as a wave of full-time students start or return to campus life. The reputation and staying power of the institution continues to be a priority for students.
According to Yardi Matrix’s Student Housing National Outlook Spring 2023 report, the top 50 largest schools in the Yardi 200 are projected to see the highest enrollment through 2028, at 3.8 percent, almost double that of the 2.1 percent growth rate forecast for the remaining 150 schools. And as with many other multifamily product categories, the Sun Belt and West often offer particularly attractive opportunities for development and investment.
Record preleasing volume is fueling development, as well. As of March, 69.7 percent of beds were preleased for fall 2023, up from 61.9 percent last fall. “Many owners are putting together leasing strategies for the 2024-2025 academic year, because things moved so quickly for 2023-2024, in terms of leasing velocity,” said Schaefer.
Deliveries and demand
In most markets, demand is expected to outweigh supply in the near term. “New development deliveries are down significantly, due to the pause that happened during COVID,” noted Isaac Sitt, co-founder & co-CEO of Vesper Holdings. Only a handful of markets are at risk of overbuilding.
“Most schools have not reached their full capacity and have capture rates at 50 percent to 60 percent,” remarked Jeff Adler, vice president of Yardi Matrix.
At the start of the second quarter of 2023, 70,000 beds were under construction, an increase of 20,000 compared to the previous quarter, according to Yardi Matrix data. However, in the next few years, deliveries will taper, as fewer projects enter the financing and pre-construction stages and the properties currently underway reach completion. “The out years are a bit of a concern because the planned pipeline is declining,” noted Adler. “We won’t see the same volume of developments to backfill.”
For student housing developers building to own, current rent trends point to steady appreciation. According to Yardi Matrix’s report, year-over-year rent growth was more than 7 percent for properties as much as 3 miles from campus, compared to growth in the upper 2 percent and low 3 percent range in fall 2022. From 2021 to 2022, communities more than 2 miles from campus demonstrated the highest rent growth at 21.1 percent per bed, Berkadia reported.
Despite a generally attractive climate for new student housing product, sponsors continue to face some of the same hurdles as their counterparts in other multifamily sectors. “We’ve seen illiquidity over the past several months and have been more heavily dependent on agency financing,” said Ryan Lang, vice chairman & head of student housing at Newmark.
Wider spreads and the debt environment may limit borrowers’ options for financing investment deals or refinancing, and even for deals that do pencil, leverage is lower. The much-discussed distress among some regional banks may also limit access to credit or bump up prices.
New development may be more challenging to finance than existing assets with reliable cash flow. “Financing is more expensive to procure, but there is debt available from the GSEs, banks and life companies,” said Schaefer.
According to Lang, loan values are constrained, debt coupons have significantly gone up and lenders are being more selective in what they’re looking for. “There’s a pronounced focus on flight-to-quality, but the prevalence of core equity that we’ve seen over the past several years has certainly shifted, said Lang.
“Even though construction costs aren’t rising as fast as they were previously were, costs are still high,” commented Barrett Lowell, head of education asset management at Harrison Street, during the MHN Voices webinar, “Student Housing Strategies: How Is the Textbook Changing?” According to an analysis of government data by the Associated General Contractors, a construction industry trade group, cement prices rose 13.7 percent year-over-year in April, electrical switchgear costs jumped 13.3 percent and the price of concrete increased 13.2 percent.
While purpose-built student housing is leading the way in the project pipeline, value-add properties present an alternative with upside potential in the form of higher rents and a larger customer base, according to some market participants. “Renovating older stock with existing cash flow (is) the better play right now,” said Sitt of Vesper Holdings. If purchased at a low enough basis to allow for renovation capex, these properties can be acquired at a lower price than new construction, added Elliott Tamir, Vesper’s co-CEO.
Older assets that may be farther from campus are also attractive for their stable cash flow, which benefits from competitive pricing. “At a vintage property we’re selling near the University of Georgia, rents are half of what some of the new construction next to the campus is charging,” noted Schaefer.
Like the entire multifamily sector, student housing has an affordability problem. According to a March 2023 report from NMHC, rents have become significantly less affordable during the past decade. Today, per-bed rents for purpose-built student housing are 25 percent higher compared to 2013.
“The reason rents have gone up is because of competition with (market-rate) multifamily, and we should think of it as just sort of one piece of the overall housing puzzle,” said Jack Liebersohn, the report’s co-author and an assistant professor of economics at the University of California Irvine, who studies student housing markets and affordability.
In such high-cost markets as New York and California, the affordability issue is particularly dire. For example, some students at the University of California’s Santa Cruz campus commute an hour and a half to class because of the lack of affordable housing nearby, shared Liebersohn.
Some areas need both affordable and market-rate housing (options). “There are students who have money to pay higher rents, and if we don’t build accommodations for them near campus, they will move to nearby areas and push those residents out.”