Now that COVID-19 restrictions have eased, students worried about online classes are eager to return to class full-time, and college administrators couldn’t be happier. Millions of students across the country have flocked to their campuses now that the fall 2022 semester is in full swing, and with many universities across the United States reporting record admission rates, student housing is looking like more and more to an attractive commercial real estate investment.
Student housing is one of those niche asset classes that many large real estate companies haven’t really warmed up to until recently, as the industry looks poised to benefit from several different tailwinds. Given that student housing construction activity is low compared to other asset classes, there is not much new competition for landlords. Near-campus rents are rising due to the nationwide housing shortage, and the return of more international students could further increase demand.
If that’s not much of an indication that investors are being forced to believe that student accommodation is the next ‘big’ thing in commercial real estate investing, then perhaps Blackstone’s recent acquisition will. Last April, Blackstone Properties paid $13 billion for American Campus Communities (ACC), the largest developer, owner and manager of off-campus student housing in the United States. The $13 billion deal grabbed headlines, indicating that interest in the student housing sector had suddenly shifted, but it wasn’t even Blackstone’s first foray into student housing. In 2021, Blackstone and Landmark Properties, another student housing developer and entrepreneur, launched a $784 million joint venture to recapitalize eight student housing units located at “leading universities”.
When an industry leader like Blackstone invests mind-boggling capital into a new venture, the industry takes notice. Much like how offices have been impacted by pandemic-induced remote working, college campuses have been totally disrupted by pandemic-induced online learning. The question of whether or not university properties would be as important after the pandemic as they were before the pandemic persisted. But Blackstone seems confident that college campuses will be bustling as they once were, and if that’s the case, they’ll almost certainly need accommodation for their students.
Many investors, including institutional commercial real estate investors and multi-housing newcomers, have already followed Blackstone’s lead. Last year alone, the volume of student housing transactions topped $10 billion, with fourth quarter activity the strongest in the industry’s history. Before the pandemic, 2020 was expected to be one of the busiest transaction years in the history of student housing investments. However, COVID-19 has strangled much of the deal flow as pandemic-induced remote learning has driven the tenant base away from student accommodation. But as students return, the sector is attracting interest from established investment organizations and new investor groups.
Anchored assets, transient tenants
Kevin Shtofman, chief operating officer at NavigatorCRE, a commercial real estate data management platform, has long been a proponent of strong student housing returns, long before COVID-19 hit the radar. “I think what COVID has really exposed is that educational institutions that don’t have an exciting or strong brand attached to them are more at risk, but I’m not sure why student accommodation has been overlooked because there was, and still is, so much going for her.
For Shtofman, two key points stand out as important for an investment in student housing. For one thing, the close proximity that student housing complexes almost always have to their campuses is a selling point on its own. “You’re talking about a collection of buildings, many of them over a century old, that have institutional branding supported by local donors,” Shtofman said. “They can never really pick and move, and that anchors your tenant base.”
Second, student housing is an asset class that renews its tenant base every year with credit guaranteed by the student’s parents, who usually have better financial resources. “You have this ever-changing rental rate that’s always paid market value, and it’s backed by people with the wherewithal to ensure their children have an enjoyable college experience,” he said. Ironically, Shtofman’s second point completely undermines one of the main reasons many real estate investors have been reluctant to jump on the student housing bandwagon: while buildings may be well-grounded, tenants are certainly transient.
Supply and demand
Not only does the pool of tenants never run out, but the demand for student accommodation has never been higher. Forty-three percent of four-year colleges struggled with housing insecurity in 2020, an eight percent increase from 2019. Additionally, 14 percent of students who attended four-year institutions or two-year-olds have been homeless in the past year.
Inadequate housing is a huge problem for colleges and universities because the reality is that students who cannot access housing are unlikely to stay enrolled, costing institutions money. Attempts to accommodate students have resulted in unexpected solutions at colleges struggling with long waiting lists for university housing. In fact, the University of California, Santa Barbara has become so desperate to put a roof over its students’ heads that it is building an 11-story windowless concrete block to solve its housing problem. The kicker? It’s not even designed by an architect. But hey, it will house 4,500 students when it opens in 2025.
Many colleges simply don’t have the inventory to accommodate their students, but for real estate professionals, there is opportunity in the shortage. Higher demand means higher rents. Once a student decides to pursue an education for four years, they must find accommodation as most do not have the choice of living on campus or commuting from home. A captive market results.
Student housing is certainly different from other property types, but with a looming recession and the post-pandemic state of real estate looking uncertain, the student housing model follows a very predictable formula. The school year begins and the students move in. The school year ends, the students move out, and the cycle continues for years. Add to that the common model of rent per bed instead of rent per unit, this predictability mitigates real estate risk and student enrollments only increase.
Certainly, with higher tenant turnover, student housing owners incur more labor and expense than other asset classes. Clean the property, rent it out, gather rental applications, run tenant screening reports, sign a new contract (usually with a tenant who is brand new to the rental and tenancy process), perform the move-in visit and other tasks take time and money. But now, student housing owners with an effective tech stack are learning how to streamline those processes.
The series of lockdowns that followed COVID-19 highlighted the human need for interpersonal connection and the critical role that building solutions can play in facilitating that experience. Technology can perform a variety of tasks in student accommodation, including student profiling, a platform to voice welfare concerns, a way to book shared spaces safely, and a way to report security concerns. maintenance.
High demand, tenant turnover, and the ease of technology certainly shed a recession-proof light on student housing. But these aspects do not necessarily equal resilience in the event of an economic downturn. For one thing, the demand for student housing is only exorbitant in some places, as land for housing development is simply not available. An asset can only be resilient if it can even exist in the first place. Additionally, college enrollment has fallen for the fifth straight semester, so while college schedules may guarantee a tenant turnover rate, the turnover may only be as high as the number of students showing up to move in.
Yet many investors believe that even in difficult economic circumstances, student accommodation real estate should continue to provide secure long-term returns. “I know that there are riskier markets than others, but I still believe in this asset class,” added NavitagorCRE’s Shtofman. “You have proximity, turnover, lease exchange and good credit, all support a longer term thesis in student housing.”