There are 11 university markets set to add 1,000 or more student housing beds this year, according to data from RealPage. The Richardson, Texas-based research firm tracks new construction, rental rates and leasing activity in 175 core university markets for its student housing data.
Overall, RealPage reports that approximately 42,000 new purpose-built student housing beds will deliver in 2021, which falls into the firm’s normal supply growth range of 40,000 to 50,000 beds annually. Carl Whitaker, senior manager of market analytics at RealPage, says that figure is an encouraging sign given the uncertainty and disruptions of the past year from the COVID-19 pandemic.
“That 42,000-bed number was about what we hoped to see,” says Whitaker. “The pandemic was so sudden that developers that were looking to build in 2021 had gotten just far enough down the planning process that they went ahead and proceeded as if it was a normal year.”
In Walker & Dunlop’s annual year-end student housing report (2020), the Bethesda, Maryland-based firm found that 38,036 student housing beds will come on-line in 2021, which is a 27 percent decrease from 2020.
For both 2020 and 2021, the Southeastern United States is dominating in terms of new student housing deliveries. Of the 42,299 beds delivered across 85 individual properties in 2020, about 38 percent of the beds were at or near colleges in the Southeast, according to Walker & Dunlop research. The next closest region was the Southwest with 16 percent of all beds delivered.
Thirty-eight percent of all beds in the 2021 development pipeline are in the Southeast as well. RealPage tracks that four of the top 11 markets for new supply growth are in the Southeast, the most of any region.
Walker & Dunlop Managing Director Christopher Epp says that the Southeast traditionally leads the pack in terms of supply growth for many reasons, chief among them that student housing is a legacy business in the region.
“Purpose-built student housing as we know it today was born out of the Southeast,” says Epp. “Markets like Tallahassee, Athens, Tuscaloosa and Columbia housed the very beginnings of student housing 25 years ago, and for one reason or another, a lot of developers have continued to focus on those markets.”
There tend to be fewer barriers to entry in terms of land availability and zoning in the Southeast, and Epp says that a lot of schools in the region are mandated to grow their enrollments while universities in other regions have an enrollment cap. He also says the since the Southeast’s top markets have deep roots in student housing, students have come to expect premier living conditions while they’re in school.
“The residents know what to expect as it relates to student housing, and they are always looking for the newest and greatest thing,” says Epp. “The kids always pick up the new shiny penny on the ground and lease the new product.”
On the flip side, the West Coast is a laggard in terms of supply growth for 2020 and 2021. Beds delivered in 2020 make up 11 percent of all new beds delivered, and those schools are set to comprise 12 percent of all new U.S. beds this year, according to RealPage.
Geography and land availability/costs are headwinds for development on the West Coast. Additionally, Epp says part of the reason is that student housing isn’t as established a real estate property class in the Western U.S. as it is in the Southeast.
“There are some newer projects that have been built and the acceptance of those is kind of in its infancy,” says Epp. “The students are like, “Oh wow, that looks cool, but is it an office building? Or did they mean to put this in Las Vegas but they put it in Laramie, Wyoming?’ There is student housing near campus in some markets, but those are only student housing by default.”
Of the top 11 university markets in terms of new supply, only two markets are adding more than 2,000 beds this year, according to RealPage. This is University of Texas at Austin (2,173 beds) and Georgia State University (GSU) (2,066 beds). Interestingly, both Austin and downtown Atlanta have another school in the top 11 of this list: Saint Edward’s University (No. 5 at 1,535 beds) and Georgia Tech (No. 8 at 1,316 beds).
Whitaker says this clustering effect isn’t entirely new to the student housing sector, citing Florida State University (FSU) and Florida A&M University (both in Tallahassee) as having a similar dynamic in previous years.
“What typically happens is a majority of students living in a newly delivered property are going to attend either one of those universities, and it’s not necessarily a 50-50 split,” says Whitaker. “We have seen that historically where a property will get delivered and is technically closer to one campus but because there is a much bigger campus nearby, it does end up being a split of students who live there across both universities. That’s what we’ll see in these instances.”
New and recently delivered properties in Austin and Atlanta include Moontower and Waterloo in Austin — both by Lincoln Ventures — and Aspen Heights Atlanta near GSU in the city’s Summerhill district, the 741-bed Reflection by The Atlantic Cos., The Metropolitan at Atlanta and Theory Interlock in Atlanta’s West Midtown district.
FSU was highlighted in Walker & Dunlop’s report as being the No. 2 most desirable market for 2021 by survey takers among Power Five schools. The respondents also chose FSU the most when asked for their bottom three student housing markets.
“FSU is one of those just very polarizing markets, depending on who you are and your location, asset quality and pricing structure,” says Epp. “It bears out in the results that there are the haves and have nots. There are companies that are thriving at FSU because they are in the right location, they built it for the right basis and they have the right rent structure. And then there are companies that are on the opposite end of the spectrum.”
No Slowdown in Demand
According to RealPage data, July preleasing at the core 175 universities hit 86.7 percent, which is the first time a month’s preleasing activity surpassed pre-COVID-19 levels (July 2019 saw preleasing at 85.6 percent). Additionally, from June to July 2021 preleasing jumped 9.9 percent, the largest monthly jump recorded this late in the year in several years.
Whitaker says that students were reluctant to lease units in the early part of the year because universities weren’t committing to opening fully for in-person classes. Once schools began announcing a more or less normal year this past spring, preleasing began to pick up exponentially.
“By April and May, we started to see that fall 2021 number really increase in terms of preleasing activity,” says Whitaker. “A lot of what we’re seeing now is just some of that hesitation that was there previously has washed away and now is leading to more leasing activity.”
Rent growth also hit its highest rate in July, according to RealPage. Effective asking rents were up 2.1 percent annually in July and also surpassed the July 2019 rate. Once again the abundance of caution from student renters in 2020 and early 2021 helped boost property performances for developers and landlords, especially for properties one mile or farther away from campus.
“The one-mile-plus properties command about $180 cheaper rent per month than to live right next to campus, and even if this is a ‘normal’ school year, some students still feel better about going ahead and saving the additional money because they aren’t sure what the semester could look like,” says Whitaker. “When schools began announcing their fall plans is when students began to shop around more. Because of the increase in traffic, this gave operators a little bit more ability to push rents.”
Whitaker expects pedestrian assets to bounce back in terms of leasing and rent growth in future years as students oscillate between off-campus and on-campus housing.
Storm Clouds Ahead?
The past two months has seen the rise and rapid spread of the Delta variant of COVID-19, which the Centers of Disease Control and Prevention (CDC) says represents nearly 99 percent of all new COVID-19 cases. The latest chapter in the pandemic has caused some schools such as University of Texas at San Antonio to pivot to remote learning for the first part of fall semester.
Whitaker doesn’t expect the last several months of preleasing to be undone by an uncertain August, at least not industrywide.
“If we do see any shifts, it is going to be very school-specific, whether it is a university system or an individual campus,” says Whitaker. “That’s where you might see some of those numbers start to moderate. Some schools that are on an earlier calendar are already underway.”
One area where student housing professionals are keenly aware of COVID-19’s lasting impact is the relative shortage of international students in U.S. colleges at the moment, which lessens overall demand for student housing as about 6 percent of U.S. college students in 2019 came from abroad.
Four colleges have more than 15,000 foreign exchange students in their 2020 enrollment, according to data from the Student and Exchange Visitor Program (SEVP). These include Northeastern University in Boston, New York University and Columbia University in New York City and the University of Southern California. In 2019, all four schools had international student enrollment exceeding 18,000 students.
According to data from SEVP, which is part of the U.S. Immigration and Customs Enforcement (ICE), international enrollment was down nearly 18 percent annually in 2020, and new international student enrollment was down 72 percent compared to 2019.
“Foreign enrollment is a conundrum,” says Epp. “Student housing supply will be impacted by the same forces as other real estate sectors, but our demand issues will be a little bit different because of our somewhat dependence on foreign enrollment.”
Construction costs are also impacting the development pipeline for student housing. The Producer Price Index (PPI) for construction materials and components has risen more than 20 percent over the past 12 months, according to the Bureau of Labor Statistics.
Whitaker says those prices have started to normalize somewhat compared to the spring and summer when prices for lumber and steel were up dramatically. However, he notes developers aren’t out of the woods yet.
“What developers are experiencing now is probably more delays along the supply chain as opposed to concern with significantly rising construction costs,” says Whitaker. “Constructions costs are not necessarily as much of an influencing decision beyond 2021 as they would have been had input prices continued to increase as quickly as they were.”
Whether it’s construction costs or general uncertainty with the scope of the Delta variant outbreak, student housing professionals are expecting 2022 to be the first full year where the pandemic will severely limit the supply hitting the market.
The Walker & Dunlop report’s survey takers are bearish about the volume of student housing deliveries for the next few years. About half of respondents chose 70,000 to 100,000 beds would be delivered from 2021 to 2023. Walker & Dunlop notes that the three-year historical average for student housing deliveries is traditionally around 130,000 beds.
Epp says that a less-than-robust pipeline should theoretically help boost the performance of existing product, including higher rents and occupancy rates. From an investor’s perspective, Epp says the health of the market and its performance amid the pandemic last year should help attract plenty of investors for the foreseeable future.
“We knew student housing was recession-proof, but we didn’t know it was going to be pandemic-proof,” says Epp. “Collections were high and kids moved back to their universities and into their properties. Because investors are seeing kids move back to their campuses for the second year in a row, I really do think it will be a boon for investors for the foreseeable future.”
This article was originally published in the July/August 2021 issue of Student Housing Business magazine.