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Surging Demand Drives Cap Rates for Student Housing Lower

Investment sale volume on student housing properties reached a new record in 2021 as the sector has fully recovered and schools largely returned to full on-campus instruction.

Student housing properties have emerged stronger than ever coming out of the COVID-19 pandemic and that has led to increased interest from real estate investors, including some that had not targeted the sector previously.

With many colleges now fully back to in-person classes and the U.S. economy on strong footing (despite some headwinds from inflationary pressures and global uncertainty), student housing sales volume is now higher than it was prior to the beginning of the pandemic.  As a result, 2021 ending up being the biggest year for student housing sales in the last decade.

Prices for purpose-built student housing are now higher on average than they have ever been, relative to the income from the properties. And they are likely to rise even higher—pushing cap rates even lower.

But there’s still one major attractive selling point: student housing properties trade at a discount relative to conventional multifamily properties.

“While cap rates for these assets are at all-time lows, they are still trading 50 to 100 basis points higher than the cap rates for conventional multifamily assets,” says Frederick Pierce, president and CEO of Pierce Educational Properties, based in San Diego.

Investors spent more to buy student housing properties—a total of $5.8 billion—in the fourth quarter of 2021 than any other quarter in the last decade, according to Real Capital Analytics (RCA), based in New York City. That’s more than the $4.4 billion they spent in the fourth quarter of 2020, when relief over the strong performance of student housing during the pandemic released a flood of pent up demand. It’s also more than the $5.5 billion investors spent in the third quarter of 2018, the busiest quarter of the boom for investment in student housing before the pandemic.

“The sheer volume of transactions was astonishing by any measure,” says Jaclyn Fitts, executive vice president and co-lead of the national student housing team for CBRE, working in the firm’s offices in Dallas.

The prices these investors pay for student housing properties continues to rise relative to the income produced by the properties. These rising prices have been squeezing the average yields for student housing investments lower and lower for several years.

“Cap rates had fallen already dramatically,” says Fitts.

Average cap rates fell to 5.1 percent in the forth quarter of 2021, down from 5.4 percent the year before and 5.6 percent in the fourth quarter of 2019, according to RCA.

But cap rates for student housing properties are likely to fall even further as prices rise even higher in the coming year. That’s because the average cap rates for apartment properties have already led they way in 2021—falling even further than student housing cap rats. Apartment cap rates averaged a stunning 3.9 percent in the fourth quarter of 2021, down from the mid-4-percent range the year before, according to RCA.
“Student housing cap rates fell in the fourth quarter—multifamily cap rates overall fell even further,” says Fitts.

New investors continue to put money into student housing properties because of these relatively high yields.

“We are regularly seeing traditionally conventional buyers ‘crossing over’ to student apartments for the comparatively higher yield,” says Pierce. “Pedestrian assets at 'Power Five' football conference universities are routinely being considered a viable alternative to conventional multi-family properties.”

Prices continue to fall in the bidding wars for student housing properties. Sellers also consider the reputations of potential buyers and the likelihood that a sale will close quickly.

“Perceived certainty of execution is still highly valued by sellers, as well as a buyer reputation that they don’t “re-trade” the price on their acquisitions,” says Pierce.

Investors find higher yields beyond large state universities

Leading institutional investors continue to offer huge amount of cash to quickly buy new, class-A, student housing properties located within walking distance of large, Power Five, universities. But smaller investors continue to use their knowledge of local markets to buy properties near smaller schools at higher cap rates.

“Generally, properties at smaller universities and in secondary or tertiary markets are often most appealing to regional investors who already own apartments in the local market,” says Pierce. “There are also some national buyers who are attracted to assets at these types of universities due to their comparatively higher yields and cap rates.”

These properties in smaller student housing markets typically sell at cap rates 100 to 200 basis points higher than properties near larger, state schools, says Pierce.

Investors can also find opportunities to add value to older properties located further than a half mile from universities.

“That is our greatest opportunity,” says Fitts. “Non-pedestrian product offer affordability… there is still demand for that.”

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