The State of Student Housing: Mature and Realizing its Potential
The student housing industry continues to reach maturity, advancing far from its identity crisis several years ago shaped by drab on-campus dorms and keggers. Ultra-modern, amenity-laced properties have made moving away from home and living on or near campus highly desirable.
But that’s not the half of it. As properties have evolved to complement the real purpose of college life—to learn something useful—while creating strong business models based on leasing beds and not units, the U.S. student industry has caught the attention of lenders far, far away from campus.
Some of the industry’s titans agree that in recent years student living has finally realized its investment potential, one that now compares with or exceeds other housing verticals in some markets. Stable returns and solid operational fundamentals are fueling much interest domestically and internationally.
Last year’s swap of some large domestic portfolios and increased international investment interest are just some of the signals that student housing has grown into a sophisticated housing vertical. Experts believe that the industry is on solid ground and hasn’t realized its peak, and that 2018 isn’t the time to get out.
The industry is sustaining strong developmental numbers at 45,000 beds annually. Solid sales volume in 2017 at $9.65 billion and 158 transactions followed a record year in 2016, according to the 2017 FourPoint Year-End Report. Last year went down as one that set the new norm in student housing sales.
Also, origination volume topped an all-time high as lending soared to $7.25 billion. And for the second consecutive year, portfolio transactions reached record levels at $5.1 billion, surpassing the all-time mark by nearly 18 percent.
A never more intriguing time to be in the market
Tough act to follow? Not entirely.
“It’s never been a more intriguing time to be in the market,” said Peter Katz, executive director of Institutional Property Advisors.
The industry has followed a similar growth trajectory as multifamily in recent years, seemingly settling into “normalcy” after some banner financial performance.
Student housing witnessed slight drops in rent growth and occupancies, as well as development, in 2017. Top companies report rent growth has settled from 3-4 percent to 1.5 to 2.5 percent, occupancies are lower by 2 percent and new development has trimmed significantly from the record 63,000 beds in 2015.
Yet leaders are saying 2018 is showing signs of another good run, one that will continue to position developers with a variety of capital options. New investors entering the market have done their homework and student housing is no longer a tough sell.
“It’s much easier to raise equity these days,” said EdR CEO & Chairman of the Board Randy Churchey. “The asset class is truly an asset class that has an institutional following and an international following. It wasn’t long ago we were still trying to convince people why student housing was an asset to invest in. Today is much easier. You don’t have to do much education.”
Student housing finally realizing everything it hoped to accomplish
The momentum the industry has built should weather any fears of rising interest rates and escalating construction costs, two factors that leaders addressed in early April at the opening of the 10th edition of the InterFace Student Housing Conference in Austin. A record 1,270 attended the conference nestled in the Texas hill country, an appropriate venue since the Lone Star state sports three of the fastest growing cities in the U.S. on Forbes top 10 (Austin is eighth).
Bill Bayless, CEO of American Campus Communities, said student housing is finally realizing everything that it hoped to accomplish. Cash flow is stable and the supply-and-demand imbalance of more units needed is building investor confidence.
“Institutional investors feel more comfortable than any sector in game,” he said.
Churchey said a wealth of data provided by analytics miners like RealPage Analytics has helped elevate the industry before the eyes of financial providers. Further, a world-wide infatuation with U.S. higher education has helped thrust student housing into the spotlight.
“One reason capital all around the world is attracted to student housing is that higher education in U.S. is envied,” said Scion Group President and Co-founder Robert Bronstein. “The flagship institutions in the in U.S. are global brands. It’s the quality and appeal of higher education in U.S., which is many times larger than anywhere else in the world. That’s not going to change any time soon.”
Peter Stelian, CEO & Founder Blue Vista Capital Management, said student housing is a more accepted asset class within the foreign investment community. Proof of that are moves in recent years by foreign firms Mapletree and GIC, who have emerged as student housing investment leaders. British conglomerate Mapletree has put down roots in several U.S. states from Minnesota and Michigan to Texas and Virginia. GIC is an Australian based investment firm whose presence is widely known in the U.S.
Like other housing verticals, student has felt the tremors from a rocky construction industry and high land prices that border on the “insane,” Stelian said.
Wes Rogers, president and CEO of Landmark Properties, said his company has successfully offset the shortage of wood framers by incorporating pre-fab construction into a development business that has never been healthier. Walls are going up faster and fewer carpenters are needed.
“We’ve had difficulty getting high quality, bondable sub-contractors,” he said. “We’re mitigating that by doing more panel systems.”
Gen Z is transforming how developers look at properties
Gen Z’s arrival has already begun the transformation of a new generation of resident. (Hard to believe, but those born in the mid-’90s to now are the focus of student housing developers and operators).
More conservative in nature and with a willingness to learn, Gen Z is changing the face of properties and scaling back a once amenity-centric strategy to development of spaces that nurture learning.
“Gen Z is focused on academic success,” Bayless said. “Our off-campus properties are looking more like properties we develop on campus. Academic and fitness centers are becoming most desirable. They want to be successful academically and healthy. Sexy real estate, it’s what they really want.”
His word of advice: “Don’t forget what your business is. Our business is not real estate. Our business is creating environments that are conducive to academic success.”