The strongest leasing in years lured new investors to student housing this fall—including a healthy mix of institutions, international investors and private buyers.
Experts already thought student housing communities would be fully-occupied for the new school year this fall. Most universities implemented vaccine mandates and other measures to enable them to allow for students to return to fully reopened classrooms as the coronavirus pandemic has waned. But even more students signed leases for the semester than experts had anticipated.
Investors responded by spending even more to buy student housing properties than they did before the pandemic.
“More and more investors have been turning to the sector,” says Jaclyn Fitts, executive vice president and co-lead of the national student housing at CBRE, working in the firm's Dallas office.
More dollars spent on student housing than before the pandemic
Buyers spent $2.5 billion on student housing properties in the third quarter of 2021, according to Real Capital Analytics (RCA), a data firm based in New York City. That’s much more than the $393 million they spent in the same period during the pandemic year of 2020. It’s also a lot more than the $1.9 billion they spent in the third quarter of 2019.
These investors paid high prices. “Cap rates for student housing properties are at all time lows,” says Fred Pierce, president and CEO of Pierce Education Properties, based in San Diego.
These cap rates averaged 5.4 percent in the third quarter of 2021, according to RCA. That’s down from 5.6 percent the year before and 5.5 percent in 2019. Investors pay even higher prices for student housing properties within walking distance of large state universities, with cap rates in the low 4s or even high 3s, according to Pierce.
Those low yields for student housing as still high compare to what investors are willing to accept for the conventional apartment properties in top locations in top markets, which can have cap rates in the low 3s or even high 2s.
“Crossover capital from multifamily to student housing is becoming more prevalent,” says Pierce.
Best leasing in years for student housing
Experts predicted leasing would by strong at student housing communities for the new, 2021-2022 academic year. But the real results far exceeded expectations.
“Both rent growth and occupancy ended the year at their highest level in five years,” says Carl Whitaker, senior manager of market analytics for RealPage. “That was a welcome sight for owners and operators.… the fall 2020 year was the weakest performance seen in the industry in at least a decade.”
Across the U.S., 93.7 percent of student housing beds were occupied as of October 2021, according to RealPage. That’s up from just 87.6 percent the year before, when the coronavirus pandemic forced many college students to attend their classes online. It’s also up from 92.3 percent in October 2019 and 92.6 percent in October 2018—long before the coronavirus scrambled the U.S. economy.
Student housing properties near top colleges are doing even better. “The super majority of our properties have occupancies ranging from 99 percent to 100 percent,” says Pierce.
Institutions and international investors buy big
Investors from all over the world—including some of the biggest institutional investors in the world—are investing once again.
“Domestic institutional investors and foreign capital have aggressively returned to student housing,” says Pierce.
These investors are typically interested in large, new developments where they can invest a large amount of capital at one time—like many of the new, mid-rise and high rise student housing properties that have opened in recent years. “Large institutional investors are gravitating toward new development and recently completed properties valued at $50 million and up,” says Pierce.
Private buyers like family offices can also still find opportunities to make their share of deals. Private entities spent nearly half (44 percent) of the total dollars invested in acquiring student housing properties, according to RCA. Cross border investors spend nearly a third (30 percent) of these total dollars. Institutional investors and equity funds spend nearly a quarter (24 percent).
“Smaller investors are able to put money into smaller transactions and distressed transactions,” says CBRE’s Fitts.
For example, properties built between 2000 and 2015 are likely selling between $15 and $50 million and are targets for small and mid-sized buyers, according to Pierce.
“Acquisitions in secondary and tertiary markets are being dominated by local and regional buyers,” says Pierce. “They perceive very good comparative value in those locations.”