From a leasing and rental rate perspective, the outlook couldn’t be brighter in the student housing space. Yardi’s National Student Housing Report saw 96.6 percent of beds leased and an annual rent growth of 4.1 percent for the fall 2022 preleasing season at its ‘Yardi 200’ universities.
These numbers are, for obvious reasons, a boon for the industry at large — particularly following several abnormal years surrounding the COVID-19 pandemic.
But it isn’t all sunshine and roses where higher rental rates are concerned. Raising the price to live in your properties is a delicate balance, and while there are many inherent benefits to owners and operators, there are also a number of issues that need to be considered — chiefly as it relates to a higher level of expectations from both students and parents.
Levels On The Rise
The industry’s performance ahead of the fall 2022 semester was nothing short of robust, and Casey Petersen, chief operating officer of PeakMade Real Estate, anticipates rent growth going into the 2023-2024 academic year to be even stronger. “We’ve budgeted for higher rent growth this year, and based on current velocity, we expect to significantly outperform,” he says.
This experience is not unique to PeakMade; it’s being seen industry-wide. Asset Living is 15 points ahead in its pre-leasing cycle year-to-date, with both the number of renewals and new leases ahead of schedule. “We’ve had some markets that are pushing rents over 10 percent and some up to 15 percent,” says Jason Fort, executive vice president of business development with Asset Living. “Those markets are where enrollment is really flourishing in the Power 5. We’re honestly in rental rate nirvana right now in terms of what we’re seeing — absolutely record growth.”
“In all our time in student housing, we have never seen leasing strength close to what we are currently experiencing today,” agrees Tadros ‘Teddy’ Abdelmalek, national director of business development with Campus Life & Style (CLS). “Our industry normally sees steady rent growth of 2 percent to 4 percent each year, with an occupancy percentage in the low- to mid-90s. For the upcoming school year that begins in August, CLS is on track to achieve double-digit rent growth and occupancy above 95 percent.”
The cause for this growth is threefold, according to Abdelmalek. “First, multifamily rents in most markets have been growing by double digits for the last couple of years,” he begins. “The student space was slower to react to the inflationary environment, making our rents a relative bargain compared to the conventional market for students shopping for housing. This has had the most dramatic effect on markets in close proximity to major conventional ones. Much of what we own and operate serves universities located in close proximity to these major markets.”
New development deliveries are also down significantly, he continues, and although overall college enrollment is also down, the number of students attending Tier 1, flagship universities is still growing.
“We, alongside other large operators and owners in the space, focus mainly on these markets,” he says. “Consequently, for the current school year, full time enrollment at the schools where we own properties is up 1.3 percent and freshman enrollment is up 3.5 percent.”
Determining Rents
With these factors continuing to drive demand, how does one tackle rental rates? At PeakMade, the process begins, first and foremost, with taking a fresh look at each of the company’s markets, according to Petersen. “Understanding market conditions for each property, and the community’s position within the local market is critical,” he says.
“From there, we look at how rents in each floor plan trended over the full length of the lease-up from the previous year, and how those rents benchmark to the local competitive market,” continues Petersen. “Once we have settled on what we believe to be an appropriate rental rate and we get into leasing season, all of our focus shifts to monitoring our leasing velocity relative to the local market. Ultimately, we’re focused on optimizing the balance of rental rate and leasing velocity in each market, and our process and systems allow us to do so in real-time.”
Shifting out to a macro level, the current inflationary environment has caused the cost of operating properties to go up, driving a need for higher rents in order to offer residents the experience that they are accustomed to.
“While we are very sensitive to the impact of rental rate increases, the ability to do so is also what allows us to continue to offer the products and services that residents have come to expect and operating costs at the property level have been increasing significantly in recent years,” notes Petersen. “Resident expectations regarding their college living experience have not changed — nor should they. We are focused on doing what we need to deliver on those expectations.”
Jenn Cassidy, senior vice president of student housing operations with Cardinal Group, agrees. “If you’re going to grow rents, it is imperative to continue to provide an exceptional experience for residents,” she says. “From ensuring amenities are clean, modern and functional, to providing a great customer experience, every touch point for our residents is essential. Our goal is always for our residents to thrive in our communities and find value in what they are paying for.”
Clear Communication
Once the data is determined and a proposed plan of action is in place, the process shifts to discussion with both ownership groups [where third-party managers are concerned] and current residents.
Success in this department all boils down to consistent, concise communication, according to Fort. “We schedule weekly calls with our ownership groups where we break down market surveys, traffic, history and leasing reports, including leases that didn’t sign, and we talk about what we want to do from a rental rate perspective,” he says. “This conversation is even happening on a daily basis when needed in order to adjust rents to different fluctuations in the market in real time.”
Keeping ownership expectations in line with what is needed in the market is paramount. Equally so is working with one’s existing student residents to make sure that they are being heard and that their needs are being met.
It is a universal truth that no one enjoys seeing a higher price tag. Student residents and their parents/guarantors are no exception, especially considering the host of other expenses being paid simply to attend classes. But this is a blow that can be softened with the right blend of compassion, transparency and clear communication, according to Abdelmalek.
“We try to give residents plenty of notice before the increase takes effect,” he says. “This gives them time to prepare and plan accordingly. We also clearly explain the reasons for the rental increase, such as supply and demand factors in the market. Being transparent helps build trust and can minimize resistance.”
“Finally, we try to make ourselves available to answer any questions or concerns residents might have about the increase,” he continues. “This can help reduce confusion and ensure everyone is on the same page.”
Showing sympathy towards price sensitivities is an important part of the process at RISE: A Real Estate Company. “Our teams are engaged with their residents and work to communicate with students and parents to guide them if help with budgeting is necessary,” says Vice President of Student Operations Alana Savoie.
“Most of our in-demand properties are seeing the rental increases due to a low supply in the market, so we also have residents that are more concerned about securing their apartments for the upcoming year than they are the rental increases,” continues Savoie. “With students heading back to campus and committing to living on their own regardless of in-person or distance learning, it’s a race to secure beds and that’s a big hurdle for our residents who are new to the student housing leasing cycle.”
At the end of the day, residents are like all customers — “they seek to understand the intent behind rising costs,” says Cassidy. “Particularly on renewals, it is important to explain why rents are increasing. The offset in keeping residents happy is to ensure we are exceeding their expectations, have teams that are committed to providing great service, and provide programming and social interaction opportunities to allow them to thrive.”
—Katie Sloan
This article was originally published in the January/February 2023 issue of Student Housing Business magazine.