Now that COVID-19 restrictions have eased, students restless from online classes are eager to jump back into the classroom full-time, and college administrators couldn’t be happier. Millions of college students across the country have flocked back to their campuses now that the Fall 2022 semester is in full swing, and with many universities across the U.S. reporting record admission rates, student housing is looking more and more like an attractive commercial real estate investment.
Student housing is one of those niche asset classes that many large real estate firms hadn’t really warmed up to until recently, as the industry looks ready to benefit from several different tailwinds. Because student housing construction activity is low compared to other asset classes, there isn’t much fresh competition for property owners. Rents close to campus are rising as a result of nationwide housing scarcity, and the return of more international students could increase demand even further.
If those aren’t much of an indication that investors are compelled to believe that student housing is the next “big” thing in commercial property investments, 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 properties in the U.S. The $13 billion deal swept headlines as an indication interest in the student housing sector had suddenly switched, but this wasn’t even Blackstone’s first student housing foray. In 2021, Blackstone and Landmark Properties, another student housing developer and contractor, began a $784 million joint venture to recapitalize eight student housing facilities located in “leading universities.”
When an industry leader like Blackstone is pouring mind-boggling amounts of capital into a new venture, the industry takes notice. Just like how offices were affected by pandemic-induced remote work, university campuses were totally upended by pandemic-induced online learning. The question of whether or not university properties would be as important post-pandemic as they were pre-pandemic lingered. But Blackstone seems convinced that university campuses will bustle as they once did, and if that’s the case, they will most certainly need places to house their students.
Many investors, including institutional commercial real estate investors and multi-housing newcomers, have already been following Blackstone’s lead. Just last year, student housing’s transaction volume exceeded $10 billion, with fourth-quarter activity being the most lively in the sector’s entire history. Prior to the pandemic, 2020 was anticipated to be among the busiest transaction years in the history of investments in student housing. However, COVID-19 throttled much of the deal flow as pandemic-induced remote learning kept student housing’s tenant base away. But as students come flooding back, the sector is attracting interest from both established investment organizations and fresh investor groups.
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Anchored assets, transitory tenants
Kevin Shtofman, Chief Operating Officer at NavigatorCRE, a commercial real estate data management platform, has long been a proponent of student housing’s strong returns, well before COVID-19 ever flittered on the radar. “I think what COVID really exposed is that institutions of education that don’t have an exciting or strong brand attached to them are more of a risk, but I don’t really know why student housing has been overlooked because there were, and still are, so many things going for it.”
For Shtofman, two key points stand out as important for a student housing investment. For one thing, the proximity that student housing complexes almost always have to their campuses is a selling point alone. “You’re talking about a set of buildings, many of which are a century-plus old, that have institutional branding backed by local donors,” said Shtofman. “They can’t ever really pick up and move, and that anchors your tenant base.”
Second, student housing is an asset class with its tenant base turning over every year with credit backed by the student’s parents, who usually have better financial resources. “You have this constantly churning rental rate that’s always paid at market value, and it’s backed by people with means ensuring that their children will have an enjoyable college experience,” he said. Ironically, Shtofman’s second point completely undermines one of the key reasons why many real estate investors have been hesitant to jump on the student housing bandwagon: while the buildings may be well-anchored, the tenants are certainly transitory.
Supply and demand
Not only does the pool of tenants never run dry, but demand for student housing also has never been higher. Forty-three percent of four-year universities struggled with housing insecurity in 2020, an eight percent increase from 2019. Additionally, 14 percent of students who attended either four-year or two-year institutions experienced homelessness in the last year.
Inadequate housing is a huge problem for colleges and universities because the fact of the matter is that students who can’t access housing aren’t likely to remain enrolled, which in turn causes the institutions to lose money. Attempts to accommodate students have resulted in some unexpected solutions at colleges that struggle with long wait lists for university housing. In fact, the University of California’s Santa Barbara’s has gotten so desperate to put a roof over their students’ heads that they are constructing an 11-story windowless concrete block of a building to solve their housing problem. The kicker? It’s not even designed by an architect. But hey, it’ll house 4,500 students once it opens in 2025.
Many colleges simply do not have the inventory to accommodate their students, but for real estate professionals, there’s an opportunity in the shortage. Higher demand means higher rents. Once a student decides to pursue a degree for four years, they must find a place to live because most do not have the choice of living on campus or commuting from home. A captive market results from that.
Student housing is certainly different compared to other property types, but with a recession looming in the near future and the post-pandemic state of the real estate looking uncertain, the student housing model follows a very predictable formula. The school year starts, and students move in. The school year ends, students move out, and the cycle continues for years to come. Couple that with the common model of rent-per-bed instead of rent-per-unit, this predictability dampens the real estate risk, and student enrollment is only going up.
Granted, with higher tenant turnover, student housing landlords incur more labor and expenses compared to other asset classes. Cleaning up the property, renting it out, gathering rental applications, running tenant screening reports, signing a new contract (usually with a renter who is brand-new to the leasing and rental process), doing the move-in walk-through, and other tasks all require time and money. But now, student housing landlords with an efficient tech stack are learning to streamline these processes.
COVID-19’s subsequent string of lockdowns 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 housing, including student profiling, a platform for expressing concerns about welfare, a way to reserve securely shared spaces, and a way to report maintenance issues.
Stark demand, tenant turnover, and the ease of technology certainly cast student housing in a recession-proof light. But those aspects don’t necessarily equal resiliency in an economic downturn. For one, demand for student housing is only sky-high in certain places because land for housing development simply isn’t available. An asset can only be resilient if it can even exist in the first place. Plus, college enrollment has slipped for the fifth semester in a row, so while university schedules may guarantee a tenant turnover rate, the turnover can only be as high as the number of students who show up to move in.
Still, many investors are adamant that even in difficult economic circumstances, student housing real estate should continue to offer secure long-term returns. “I know there are riskier markets than others, but I’m always a believer in this asset class,” added Shtofman of NavitagorCRE. “You have proximity, turnover, lease trade-out, and good credit backing all support a longer-term thesis in student housing.”