What CRE Investors Are Learning About Student Housing

What CRE Investors Are Learning About Student Housing

For Real Estate Investors, Student Housing Is a Profitable New MarketReal estate investors are "on track to spend more than $11 billion to buy student housing properties in 2018," according to a December 17 article in Minnesota Real Estate Journal. That's almost $3 billion more in valuation than the total deals closed the previous year.

Because of what has been termed "recession resiliency," the student housing market is termed stable, despite rising prices and worries about overbuilding. J. Ryan Lang, executive managing director of the ARA Newmark Student Housing office in Austin, Texas, notes that this asset class was characterized by record transaction volume in the second half of the year.

Student Housing Market Evolves, Remains Strong

Foreign investment and large portfolio transactions in previous years were instrumental to the strength of the student housing market. During 2018, foreign investment levels dropped somewhat, but both the number and dollar volume of smaller individual transactions increased. Over the past several years, many deals have been closed in major university towns, and there has been a corresponding decrease in the volume of new construction. Prices are also rising, and the spread in cap rates has eroded, according to Jaclyn Fitts, director of CBRE's national student housing service, but she points to the desire for diversification and alternative investments throughout the market as key factors fueling the growth of the student housing market.

Fitts uses the word "exuberance" to describe student housing market potential.

During the height of the student housing boom, in 2014, developers produced 62,000 new beds in major university markets like the University of Minnesota Twin Cities, which has campuses in Hennepin County and elsewhere. Fewer than 40,000 are expected to be opened for the beginning of the 2019 school year, based on projections by Axiometrics, a research firm. But this does not worry most analysts.

The president and CEO of an investment and development firm that specializes in student housing, Fred Pierce of Pierce Education Properties agrees that the market will continue to be strong throughout the coming year, and he believes that the perceived overbuilding may entice some investors to purchase under-performing assets in some affected markets.

Data Analysis and Needs

The student housing market is characterized by a wide variety of investment types, ranging from modern luxury developments to dorm-style housing close to campus, repurposed units in mid-rise multi-family buildings, and even rooms for rent in larger homes. Capital investors rely on current data from existing specific market databases on college applications and current enrollment, on and off-campus housing availability and occupancy rates, new construction and many other factors to make investment decisions, and often a site visit is required to gather data.

Where the data often falls short, according to Casey Petersen, chief operating officer at Peak Campus in Brookhaven, Ga., is in its ability to predict future trends and needs. Peterson insists that real estate is local and needs to be managed locally and suggests that the concept of a data warehouse that can take the data "beyond descriptive and into predictive," is an achievable goal that should help investors. Modeling trends would be beneficial, he says, not only for the specific student housing market class, but across the whole spectrum of investment activity, particularly for new mid-to high-rise multi-family housing investment.

Others point to the benefits of developing mobile apps for student housing, more transparency surrounding pricing and amenities, and software solutions to "measure, monitor and manage the customer experience." Many of these topics were explored in depth at an October 2018 student housing conference sponsored by the National Multifamily Housing Council.

Among the takeaways was the hope that a larger percentage of the $12.6 billion in venture capital investment funds would find its way into the the student housing asset class. So far, that seems to be the direction. In a June 2018 article, Forbes contributor Sean Lyons, founding partner at Triad Real Estate Partners, also expressed confidence that the student housing market would continue to perform well, even though it's still young and currently undergoing a transition from niche status to more mainstream investment.

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