By Kevin Larimer and Brandon Buell, Berkadia
Throughout the COVID-19 pandemic, confidence fluctuated around the performance and resilience of student housing properties. Understandably, commercial real estate investors pressed pause at the beginning of last year, as there was no way to know what this global pandemic meant for property performance. However, with steady collections for student housing throughout the year, confidence quickly regained.
Towards the end of last year, occupancy was just shy of 90 percent and nimble investors who took notice started to pursue the available menu of opportunities. While data will show that COVID-19 had a clear impact on student housing operations, the level of disruption was limited. In fact, according to Berkadia research, sales during the fourth quarter accounted for more than half of 2020’s total transactions and dollar volume for student housing — further proving the overall resiliency of the industry.
Strong Out of the Gate in 2021
In addition to ending 2020 on a strong note, only a few months into 2021, we have already seen the student housing market show greater strength. In fact, in the first few weeks of January alone, our student housing-specialized team at Berkadia completed nearly $250 million in the combined sales of nine properties totaling 4,376 beds across the U.S. These assets ran the full spectrum of student property types, and capital sources included foreign equity, domestic institutional, high-net-worth individuals and private equity.
All-in-all, our industry has hit the ground running in 2021. With interest rates still near historic lows and price-per-bed averages increasing year-over-year, student housing properties can offer investors attractive cash yields without the need to increase cap rates. This uniquely positions student housing assets to offer both buyers and sellers an upside.
Current Players in the Space
From an investor perspective, over the past year, most owners have been patient. Either strategically capitalizing on the strong investor demand for their assets or temporarily pausing until their properties return to optimal occupancy. Knowing which avenue to take is not always easy. However, most owners and developers continue to be bullish on the sector — they know the market will rebound and have chosen to take the long-view with no desire to sell an asset until it is operating at peak performance.
With purchasers, we have seen a surge in interest from both international and domestic capital in recent months. 2020 showed the second-consecutive year where private buyers comprised the plurality of acquisition volume (41 percent). However, activity from international and institutional buyers picked up over the past year, as well — buyer volume increased 8 percent and 5 percent, respectively, year-over-year. This upward trend signals a revitalized appetite for the strong yield potential that exists within student housing.
Increases in both the foreign and institutional buyer levels point to industry growth beyond the benchmarks set in 2019. Which, in a normal year would be impressive, but in 2020 signals even more market strength amid the challenges of a global pandemic.
Capital Wobbles Across Asset Classes
From the end of 2020 to today, investor interest has grown by the minute and the vast majority of attention is concentrated on large, brand-recognized, public universities. While there is capital available for secondary and tertiary markets, investors are much more selective and will generally need more data related to enrollment, occupancy and the overall financial health of the institution before considering an opportunity.
For assets located pedestrian to brand-recognized universities, pricing ended 2020 consistent with pre-COVID levels. This year we are experiencing a boom of capital with more demand for these top-tier student housing opportunities than there are available assets. Compounding this, we have seen an increase in yield requirements for non-pedestrian properties and assets at secondary and tertiary universities. While we anticipate this will resolve itself as capital flow continues to normalize and both fall 2021 enrollment and occupancy data become available later this year, investors remain laser-focused on finding a “sure thing.”
Emerging Opportunities
With most of the year still ahead of us, we fully expect both debt markets and sales volume to continue to rebound, particularly as in-person learning resumes and economic changes fuel enrollment numbers.
Looking at the pipeline, purpose-built student housing construction is booming with properties across the country in various stages of development. The lions share of new projects are being built to fill the current need in the Southeast. California, Texas and Florida also rank as states with the top anticipated enrollment gains over the next five years, according to RealPage University, indicating that these will be areas of immense opportunity for both developers and investors in the coming years. For investors who are bullish on student housing and ready to capitalize on this projected growth, now is the time to get in on the ground floor.
Over the next year, many new opportunities will come and go, but for investors who can remain nimble and act quickly when the moment arises, we are confident this year will reap great rewards.
— Kevin Larimer and Brandon Buell are senior managing directors of student housing at Berkadia.