Why Student Housing Stands Out in a Dislocated Commercial Real Estate Market
Start with the long-term leases, then move on to the parental guarantees
By Andrew Coen June 12, 2024 6:00 am
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Four years ago at the height of the COVID-19 pandemic, student housing was a commercial real estate asset class facing myriad headwinds and unknowns as many colleges wrestled with when in-person classes would resume. Today, with the 2020 global health crisis well in the rearview mirror, the investor appetite for closing deals for rental housing near college campuses is once again big, with strong enough tailwinds to combat possible demographic shifts on the horizon.
In fact, even amid the uncertainty of COVID with some colleges opting for either hybrid or fully remote classes during the 2020-21 school year, student housing performance largely held serve and has since soared, according to Scott Clifton, who runs JLL (JLL)’s national student housing capital markets platform with Teddy Leatherman. Clifton noted that enrollment was flat at the top-ranked 175 colleges JLL tracked in the 2020-21 school year, despite many restrictions, before doubling the following year and remaining strong since then.
“There has been really strong performance with occupancy and rent growth,” said Clifton of student housing fundamentals during the past three years since the COVID-plagued 2020-21 school year, with investors especially attracted to more stable lease terms. “You know what your rent roll looks like for an entire 12 months, so you have a little bit more visibility on that than other multifamily asset classes.”
Student housing has become one of the preferred sectors of CRE investment strategies, with performance continuing to push forward even as other asset classes struggle within a dislocated market and elevated interest rates. Rents for student housing assets jumped on average 7.5 percent annually during the 2022-23 school year and 11.4 percent for the 2023-24 school year, according to data from RealPage.
Julie Ingersoll, chief investment officer for the Americas in direct real estate strategies at CBRE Investment Management, said a major positive trend driving student housing demand is the growth of parental guarantees, which help boost the credit conditions of these projects. The average household income for parental guarantors across 16 of CBRE’s student housing assets was $194,206 in pre-leasing for the 2024-25 school year, marking 3.7 percent annual growth, according to Ingersoll.
“With that credit increase, student housing operators have been able to push rents, and the last two years we’ve seen record rent growth and record occupancy,” Ingersoll said. “We are leasing these assets up faster earlier in the prior school year, which reduces your risk as a student housing landlord, so the demand is fierce.”
Ingersoll said many of the student housing projects CBRE invests in are concentrated near schools with growing enrollments and solid research credentials. These schools will be more strongly positioned than small colleges in the coming years as the U.S. college-age population dips — a trend blamed on lower birth rates during and immediately after the 2008 Global Financial Crisis. She said another big demand driver is the trend of today’s college students often opting for bigger residential spaces than tiny dormitory rooms, coupled with the financial inability of many colleges to overhaul their aging on-campus residence halls.
The student housing sector has also become a favorite asset class of lenders and brokers, with several financings for projects closed during the first half of 2024 despite higher borrowing costs.
JLL has arranged a number of these 2024 student housing debt transactions, including a $45 million loan from Argentic Investment Management in January for a joint venture between Blue Vista and Bain Capital Real Estate to refinance Vue53, a 267-unit property with 403 beds a mile from the University of Chicago. The complex’s amenities include study lounges, a fitness center, sun decks and ground-floor retail anchored by a Target with a Starbucks.
Leatherman said the main factor driving lending interest in the sector is its strong fundamentals compared to other asset classes, without the correlation of U.S. gross domestic product growth affecting performance metrics. She also noted that every lease having a parental guarantee also boosts the credit health of student housing compared to other CRE assets.
“Mom and dad are the ones paying the rent, and typically parents aren’t going to let their credit suffer for their child’s college rent,” Leatherman said. “Because of that, we see a lot less bad debt than some other product types.”
The types of colleges JLL tackles for student housing tend to be schools that are tough to get into, or large flagship public institutions that have strong enrollment trends. Leatherman said many of the schools tend to have well-rounded Division I athletics, especially in major conferences like the Big Ten, the Southeastern Conference and the Atlantic Coast Conference.
Daniel Siegel, president and principal of Atlanta-based bridge lender Peachtree Group, said there has been a “significant” increase in the last six months of student housing developers seeking financing for new development or stabilization of their properties aided by many banks fleeing to the lending sidelines. He noted the parental guarantees common in student housing deals provide comfort when underwriting.
Peachtree has also carved out a niche with Commercial Property Assessed Clean Energy (C-PACE) financing, which a number of student housing operators are now seeking as they tackle energy-efficient features for their facilities. The lender recently originated a $13 million C-PACE loan for the newly completed 190-bed Monte student housing development at 6273 Montezuma Road in San Diego just south of the San Diego State University campus.
Siegel said that while student housing developments afford plenty of advantages compared to other CRE asset classes, there is a big — and perhaps unique — risk: construction timelines. Not delivering in time for the start of the fall semester can be very costly.
“If your construction gets delayed and you miss a lease-up cycle for that school year, there’s not really a good way to recover for that,” Siegel said. “If you miss your construction schedule and you can’t hit lease-ups when the students are signing leases, it will be hard to recover from that until the next year.”
RealPage data showed that, as of April, student housing asking rents at the 175 universities it tracks were up 5.1 percent year-over-year. The schools with student housing projects showing the biggest annual rent growths at 20 percent or above in April were the University of Mississippi and the University of Tennessee, both flagship campuses.
The momentum for student housing was also underscored last fall when Landmark Properties delivered 10 properties totaling 8,195 beds and $2 billion in value to mark the largest off-campus, single-year portfolio executed in the sector, according to the Athens, Ga.-based developer. This included Landmark’s largest residential project to date since its founding in 2004 of The Standard at Seattle, a 426-unit, 1,545-bed student housing community with amenities such as two rooftop pools. The Standard is just a few blocks from the University of Washington, another flagship school.
“Long term, it’s been a very steady performing sector that has been recession-resistant and where you’re able to get continued outsized performance year-over-year,” said Walt Templin, head of investment management at Landmark, which Student Housing Business has named the top student housing developer for the last seven years. “Also, what you often see in challenging economic times is more people often go back to school and stay in school longer.”
Andrew Coen can be reached acoen@commercialobserver.com.
