Are Student Housing Investments Making the Grade?
When pandemic lockdowns rocked the world of higher education, owners of student housing assets nearly flunked out. But now, halfway through the 2022-2023 school year, the multifamily subsector is rising to the top of its class.
Observers are calling the speed at which vacant units are absorbed “unprecedented” and the growth of rental rates “historic.” But not every school is worthy of an early decision, and admissions into the top markets are selective.
As the growth of average rent for off-campus student housing hits nearly double digits, the sector is becoming increasingly competitive. Capital is expected to continue flooding into the sector in the latter half of this year — with even more coming from global investors .
School is in session for investors looking to ace the upcoming 2023-2024 school year. In separate interviews, a roundtable of experts provided LoopNet with an orientation to the state of the student housing market.
Market Dynamics in the Student Housing Sector
Student housing market dynamics start with enrollment figures. Property management firm Asset Living analyzes figures over the past 10 years — with an emphasis on growth figures from the most recent five — looking for a skew toward the number of full-time undergraduates.
The Scion Group, which owns and operates nearly 83,000 off-campus beds globally and advises other stakeholders in the sector, looks toward the future. “When evaluating a market for investment, we need to be confident that the college or university will thrive in the long term,” said Scion Group’s senior vice president of advisory services, Jay Pearlman. “We look at a school’s 10-year strategic plan and compare that to actual enrollment trends. The details of those plans are critical.”
Looking forward involves not just enrollment growth trajectory, but proposed changes in acceptance rates. The acceptance rate is the number of students accepted compared to the total that applied, and it is considered an indicator of the strength or weakness of a university’s staying power, explained Jaclyn Fitts, the executive vice president of CBRE’s National Student Housing team.
“Selectivity is an important metric,” Scott Barton, chief investment officer of Campus Advantage, concurred. "If you are a university and you are already accepting everyone who can fog a mirror, you don’t control your own destiny as you can’t turn the dial and grow enrollment if you wish.”
Supply and demand dynamics are also paramount. Investors look at an institution’s plans to change the supply of facilities and on-campus housing, in addition to what’s in the pipeline off-campus. “Rising construction costs have created a difficult environment for new development, causing the national pipeline for student housing to decline significantly below historical norms,” CBRE’s Fitts told LoopNet. “This trend of lower supply will only bolster strong fundamentals in coming years.”
For markets with a strong supply of undergraduate housing, Baron told LoopNet that there’s room to focus on renovations to allow for more privacy options or on graduate student accommodations, which tend to always be more limited.
“Because of how evolved the sector is becoming, there are a lot of smart people looking to build in the best markets,” Barton added. “That means that even in markets with high barriers to entry, such as Berkeley, California, supply eventually finds a way to be created.”
At the end of the day, Barton continued, “we want markets with strong demand and limited supply. We think the best markets involve a university which wants to grow, has the ability to grow, and where supply will be constrained for the next couple of years both on and off campus, which is as far as we can reliably estimate."
Metrics to Study
Asset Living also looks at tuition changes over the past five years as a measure of affordability, especially as it compares to rental rate costs both on and off campus, the firm’s CEO and President, Ryan McGrath, told LoopNet.
Leasing velocity, or length of time between leases, is also a key indicator, Fitts explained. “It demonstrates how quickly students are making commitments to the school, and the strength of the demand for the purpose-built student housing in a given market.”
Campus Advantage, which provides property management and consulting services, expands beyond school figures to look at a state’s demographic growth — especially when considering investment at a public university.
“There is a widening gap between winners and losers in the current investment environment,” Scion’s Pearlman told LoopNet. “Unlike other areas of multifamily, there will be increases in durable cashflow for two to three years or beyond. This is enabled by record enrollments at top tier universities and the somewhat prohibitive new development environment.”
And “markets matter,” said Barton. “I would rather have an average or even below average asset in a great market than the other way around. We can turn assets around and improve their prospects if the market is helping, but when a market gets really soft, it can feel like swimming upstream.” Some of those dynamics are covered in this month's Deal of the Month, an auction of a student housing property in a tertiary market of Ohio.
Rental rates vary vastly by market, region, school and property type, but the overall growth trend is incredibly important for investors. The experts LoopNet spoke with agreed that both rates and leasing velocity are climbing to record highs. “We anticipate all time-high-rate growth in 2023 — perhaps upwards of 8% across the sector,” Pearlman pointed out.
CollegeHouse and RealPage are also tracking near double-digit rent growth nationally for the 2023-2024 leasing cycle, Fitts said, while velocity is approximately 10% ahead of the 2022-2023 pace. “With historically rapid leasing velocity and rental growth for the 2023-2024 school year, many owners are already analyzing how much they can increase rents for the 2024-2025 academic year,” she continued. “We anticipate leasing to begin in greater earnest this fall to capture additional pent-up demand. Capital markets are expected to have a comparatively quiet first half, with activity picking up in Q3 and Q4 as owners will have the opportunity to capitalize on their notably higher rental income for the 2023-2024 academic year.”
Determining just where the ceiling is proves to be a challenge, Fitts added. “Many assets leased so quickly this academic year that operators were left regretting how much rental revenue went uncaptured,” she said.
Seasonal Cycles to Understand
“Student housing naturally revolves around the academic calendar,” Fitts explained. Leases primarily extend from August through July, with the annual leasing cycle typically running from September of the prior fall through July or August, depending on market velocity, she said. "Late July and early August are reserved for a process called ‘turn,' a two-week period prior to move-in for the next academic year when staff make ready up to 70% of the property’s units."
Because lease terms are almost always fixed, getting the marketing cycle right is key, Asset Living’s McGrath said. “The multiple ‘s’ curves over the course of the cycle differ in each market, and therefore it’s important to market and execute leases with this in mind to maximize occupancy and avoid high vacancy that lasts 12 months.” McGrath reiterated the importance of getting the “turn” right — i.e., within a 10- to 14-day window. “Failure to appropriately prepare for this event and failure to execute both have long-term negative reputational impacts.”
McGrath went on to explain that transactions in student housing are most often tied to the leasing cycle. “Evaluating the in-place residency is vital but recognizing that so much of investment decisions rest upon annual cash flow streams, it’s important to heavily analyze the future year’s leasing efforts and how that may compare to past years as a litmus,” he said. “In markets that have later leasing cycles, the sales listings tend not to occur until summer each year, whereas early lease markets can list and transact earlier in the cycle. Understanding this nuance market by market is crucial when evaluating opportunities.”
A property’s full leasing lifecycle averages 41 weeks to execute leasing, capture occupancy and achieve revenue requirements, Barton explained. “Factoring in student breaks of 14 weeks, which equates to direct student engagement loss during fall, winter, spring and summer breaks, properties are left with 27 weeks to achieve maximum leasing velocity.”
Campus Advantage now sets targets around these numbers, and Barton said he would “caution ownership groups out there, that if you are not seeing at least a 40%-45% prelease by the end of January 2023 in a market that launched leasing at the beginning of October, you are not on target to complete your leasing season at a 95% stabilized occupancy [rate].”
Amenities and Other Qualitative Features
Just like any multifamily property, amenities are key differentiators for student housing properties. But as Campus Advantage’s Dena Costello, vice president of business development, explained, “every market is different. What may be important to a student in Columbia, Missouri is not the same as a student in Seattle, nor a student in Orlando, Florida.” The most effective way to gauge what students need in a particular market or a particular school is to conduct focus groups and polls, which can be even more useful when they are facilitated by a partnership with the university.
"Over the years, we’ve seen the trends leading towards high-end amenities to capture higher rate growth, but today’s students are looking for value, and today’s developers are looking for solutions.”
Dena Costello, Campus Advantage
McGrath, of Asset Living, noted that “must-haves” include “large, inviting pool areas,” gyms, bed-to-bath parity in units and onsite parking for both residents and visitors. “Great-to-haves,” he continued, include expansive indoor and outdoor gathering areas for both study and social needs, as well as soundproof areas for podcasting and video calls. Several of the experts mentioned the increased need for pet-friendly amenities.
Pearlman posited, however, that “amenities and ‘feature fights’ are truly behind us. It is no longer about who has the best pool or clubhouse. It is about finding a property that meets the academic, residential and lifestyle needs of students in that particular market.”
The consensus is that Wi-Fi is one of the most important necessities — and not just any run-of-the-mill service, but the fastest and most robust capacity available in any given market.
A property’s distance from the academic core of the campus is also of utmost importance. Walking distance is a key metric and a “significant focus of investors,” Fitts said.
The age of a property also reigns supreme. “Most capital will skew toward investment opportunities that are related to properties less than 10 years old and within walking distance of campus,” McGrath said. “Early-generation properties, such as those developed more than 20 years ago, will continue to undergo evaluations of modifying the assets into other offerings such as conventional and senior.”
Affordability is also becoming more critical. “Current economic factors are creating a new narrative around [more] affordable housing with functional amenities,” Campus Advantage’s Costello said. “Students are most likely contributing to their own education and getting student loans, and parents are using a bulk of current income rather than savings to assist in paying for college. Now, that’s being coupled with the developer’s cost of building materials and limited financial opportunities. Over the years, we’ve seen the trends leading towards high-end amenities to capture higher rate growth, but today’s students are looking for value, and today’s developers are looking for solutions.”
The Top Student Housing Markets
“This seems to be everyone’s favorite question,” Barton said. “I think there is enough consensus regarding many of the top markets that I won’t be giving away too many secrets if I say that the University of Tennessee-Knoxville, Clemson and Purdue all seem very attractive right now.”
Fitts mentioned all of the same, and added Madison, Wisconsin and Ann Arbor, Michigan. “These markets have common themes of strong fundamentals, enrollment growth and ever-increasing demand from prospective students,” she said.
McGrath echoed a few that the others mentioned and noted that Florida State University (in Tallahassee, Florida), Arizona State University (in Tempe, Arizona), University of Texas, Austin ,and Texas State University Metroplex (in Austin and San Marcos, Texas) as a few other noteworthy markets.
Though less specific, Scion’s list sounded familiar. “Currently, we typically enjoy markets with barriers to entry, a long-term enrollment growth trajectory and proven absorption of more students each year in the POSH (purpose built off-campus student housing) sector,” Pearlman said. “Good examples right now are top tier public universities in Texas, South Carolina and Florida.”