Student housing properties have emerged stronger than ever from the COVID-19 pandemic and this has sparked interest from real estate investors, including some who had not previously targeted the sector.
With many colleges now fully back to individual classrooms and the US economy on a strong footing (despite some headwinds from inflationary pressures and global uncertainty), the volume of student housing sales is now higher than it was before the start of the pandemic. in more. As a result, 2021 was the biggest year for student housing sales in the last decade.
Purpose-built student housing prices are now higher than average relative to property income. And they’re likely to rise even more — lowering cap rates even further.
But there is still one major attractive selling point: student housing properties trade at a discount relative to traditional multifamily properties.
Frederick Pierce, president and CEO of Pierce Educational Properties, based in San Diego, says, “Although the cap rates for these assets are at their lowest ever, they are still more than 50% of the cap rates of traditional multi-family properties.” are trading 100 basis points higher.” ,
According to New York City-based Real Capital Analytics (RCA), investors spent more $5.8 billion buying student housing properties in the fourth quarter of 2021 than in any other quarter in the past decade. That’s more than the $4.4 billion spent in the fourth quarter of 2020, when relief on the strong performance of student housing during the pandemic released a flood of demand. That’s more than the more than $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 surprising by any measure,” says Jacqueline Fitts, executive vice president and co-head 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 continue to rise relative to the income produced by the properties. These rising prices have been lowering and lowering the average yield of student housing investment for many years.
“Cap rates had already fallen dramatically,” Fitts says.
According to RCA, the average cap rate fell to 5.1 percent in the fourth quarter of 2021, from 5.4 percent a year ago and 5.6 percent in the fourth quarter of 2019.
But cap rates for student housing properties are likely to drop further as prices rise even more in the coming year. This is because average cap rates for apartment properties have already moved up into 2021 – well ahead of student housing cap rates. According to RCA, apartment cap rates averaged 3.9 per cent in the fourth quarter of 2021, down from the mid-4-percentage range a year ago.
“Student housing cap rates fell in the fourth quarter—multifamily cap rates fell even further overall,” says Fitts.
Because of these relatively high yields, new investors continue to invest money in student housing properties.
“We are regularly seeing more traditional buyers ‘crossing over’ student apartments for comparatively higher yields,” says Pierce. Pedestrian properties are routinely being recognized as a viable alternative to traditional multi-family properties at Power Five Football Conference universities.
Prices continue to plummet in the bidding wars for student housing properties. Sellers also consider the reputation of potential buyers and the likelihood of a sale closing early.
“Definite certainty of performance is still highly valued by sellers, as well as a buyer reputation that they never “re-trade” the price upon their acquisition,” says Pierce.
Investors get higher returns from big state universities
Leading institutional investors continue to offer massive amounts of cash to quickly purchase new, Class-A, student housing properties located within walking distance of large, Power Five, universities. But small investors continue to use their knowledge of local markets to buy properties near smaller schools at higher cap rates.
“Generally speaking, properties in smaller universities and secondary or tertiary markets are often most attractive to regional investors who already have apartments in the local market,” Pierce says. “There are also some national buyers who are attracted to properties in these types of universities because of their comparatively high yields and cap rates.”
Pierce says these properties in smaller student housing markets are typically 100 to 200 basis points higher than properties near larger, state schools.
Investors can also find opportunities to add value to older properties located more than half a mile from universities.
“This is our biggest opportunity,” Fitts says. “The non-pedestrian products that deliver affordability … there’s still demand for that.”
