By: Nathan Metheny, Managing Principal/Co-Founder
Student Housing Market Overview
The U.S. is undoubtedly the largest student housing market in the world, attracting sizeable capital investment annually. Student housing is the foundation of the surrounding campus community, providing the base for a strong investment within the stable education sector.
In 2018, total student enrollment in the U.S. rose to 19.9 million. According to the U.S. National Center for Educational Statistics forecasts, enrollment is marked to increase between 2018 and 2027 to 20.5 million students; this equates to an average annual gain of 67,000 across the U.S.
Although vacancy rates have shown to be in a slight decline, the distance to campus has shown to be the driving factor; students are favoring closer properties. According to RealPage, properties greater than 1-mile from campus have experienced the highest decline in occupancy rates while properties less than 0.5 miles from campus have experienced no decline.
It is also notable that economists are largely predicting the economy to slide into a recession as early as 2020; historically, a declining job market boosts enrollment numbers due to the unemployed returning to school. While the rise enrollment does have a positive effect on the education sector, it does not necessarily create a sizeable increase within the market.
Since 2014, the development pipeline has significantly slowed. Roughly 45,000 new beds have been added on an annual basis, in line with historically normalized numbers, since 2014’s high of nearly 62,000. Additionally, the majority of new supply has been centralized around the top 10 universities; Texas A&M has experienced the largest growth in new supply. Development of new supply has been controlled by limited land availability within the 0.5-mile distance seemly needed, along with increasing land value and construction costs. These constraints on new supply will prevent the risk of over-supply within the industry, shifting the focus to value-add opportunities. With the projected enrollment increase and expected development, the market will remain in equilibrium.
According to RealPage research, the 2019 national average for student housing rent growth is 1.80%. Stronger than the previous year of 1.60%, but weaker than the national multi-family average of 3.30% year-over-year growth. Similar to occupancy rates, student housing rent growth fluctuates based on the proximity to campus, with stronger rent growth closer to campus.
Since 2010, student housing capitalization rates have faced steady year-over-year compression; As of 2019, cap rates average a low of 5.55%; in 2013, student housing cap rates averaged 6.70%. The continual decrease can be attributed to the increasing numbers of institutional investors, with access to cheap capital, being attracted to the sector. Given the lack of high-yield opportunities in the current market, the attraction is increased as investors chase the high yields offered in the student housing asset class. Due to the historical performance of the sector during recessionary time periods and the expected increase in demand, student housing cap rates are forecasted to remain steady at the current record low rates.
An interesting statistic involving student housing cap rates involves the correlation between the cap rates and college football designations. According to CBRE National Student Housing, the average cap rate of assets serving universities with top football programs is 5.30%. CBRE also points out that nearly 70% of investment sales in 2018 were for assets serving Division 1 programs.
The major trend within the buyer profile points towards a marked decrease in foreign capital investment, pushing private buyers to the top position as the major player in the student housing sector. International capital still represents a large portion of the sector; several sources point out that the major reason for decline reflects international capital being deployed under domestic entities. Another strong trend signifies the rise of institutional investment, indicating that the sector is being considered a highly regarded core asset class. This classification is especially amplified with the expectations of market uncertainty, as student housing has generally shown to be stable during recessionary periods.
As the macro-economic outlook continues to be uncertain and interest rates are pushed to record lows, financing is becoming progressively cheaper. Cheap capital and increasing demand in the sector will likely lead to continued strength, compressing cap rates to historic lows. Decreasing availability of land with an attractive proximity to campus will continue to increase the price and rent of existing assets while shifting the focus to value-add oportunities.
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Disclaimer: Information contained herein has been secured from sources believed to be reliable but should not be considered investment advice. Wealthrise makes no representations or warranties as to the accuracy of such information and accepts no liability. We suggest that you consult with a tax advisor, CPA, financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks and risk implications associated with any investment.
About the Author: Nathan Metheny is Co-Founder and Managing Principal at Wealthrise. In this capacity, his primary roles include acquisition supervision as well as setting the long-term strategy and trajectory for the company.