Student housing is one of the rare bright spots in the commercial real estate industry. Despite declining college enrollment, housing demand is strong, particularly at well-known institutions that attract top students. After stagnating during the COVID-19 pandemic, student housing has been enjoying tailwinds with record-setting rent growth and occupancy levels. But like any investment, risk accompanies this sector.
Supply
While office space and multifamily apartment sales have been sluggish, student housing is thriving. This sector’s counter-cyclical nature means it can often hold steady or even grow during economic downturns, as middle-class families invest more in higher education to boost their skills and career prospects.
While preleasing velocity has rebounded post-pandemic, the market still faces a supply and demand mismatch. It’s true in markets where schools with high enrollment are experiencing growing demand while less selective universities and community colleges see declining student numbers.
Aware of this market trend, David Adelman has developed purpose-built student housing near top colleges to cater to these demand drivers. These properties offer students the desired amenities, such as high-speed Wi-Fi and modern gym facilities. They are also designed with student lifestyles in mind, as Gen Z is a lonelier generation, and they value community-centered spaces that allow them to meet up offline. It includes coffee and juice bars, study rooms, and wellness centers.
Rents
After stagnating during the COVID-19 pandemic, rental increases in student housing began to accelerate in early 2021 and outpaced multifamily rent growth. This trend results from students returning to in-person classes after lifting mask restrictions. As the 2023-2024 school year begins, preleasing and occupancy remain strong at many universities. At “Yardi 200” schools, preleasing hit a record high in July and averaged nearly 91% occupied, a 4.6% increase from last year.
This burst of growth is particularly striking given that purpose-built student housing has historically been a slow and steady niche sector. However, investor and lender participants must remain close to their borrowers to fully understand the trends driving performance and act quickly to capitalize on opportunities or intervene when needed. It requires understanding the traditional drivers of each local market and the short- and long-term operating trends at individual schools, including application, enrollment, selectivity, financial performance, and migration trends.
Financing
While student housing tends to perform counter-cyclically compared to the broader multifamily sector, astute investors can capitalize on this trend by targeting cities with excellent hospitals and medical facilities, job growth, or Ivy League colleges. These areas attract doctors, nurses, pharmacists, and other high-income professionals who can afford higher housing costs.
While rising interest rates have upset the student housing sector in 2022, operational performance remains strong despite the COVID-19 pandemic, and more significant investment players remain keen to allocate capital to the segment. It has created opportunities for smaller buyers and even traditional multifamily firms new to the sector.
Students are also shifting away from rooms designed for double or triple occupancy in favor of single occupancy units, particularly those closer to campus. As such, student competitive housing properties within a half-mile of campus generally outperform those further away. Similarly, students are seeking pre-furnished units to reduce move-in day stress.
Demand
There are 22 million university students in the US, yet most universities can only provide housing for around half of them. The rest must find accommodations off campus. It creates a strong demand for student housing. Demand remained strong this summer as the new school year approached.
While preleasing and rent growth slowed slightly in July, final occupancy levels are on par with last year’s. To meet the demands of their tenants, many student competitors offer more amenities and services. These include high-speed Wi-Fi, modern gym facilities, and communal spaces. In addition, it’s essential to choose a location with stable or improving local economies. These areas will likely see colleges expand programs and attract more students, further boosting demand for student housing.
Investors should also research universities and their enrollment trends. Often, these numbers will be available online. Look at a university’s strategic plan to determine whether its enrollment will grow over the next decade, creating a need for more student housing.
