The writer here gives an upbeat view on the case for investing in student housing.

The following article on student housing as a real estate investment opportunity comes from Celine Winter, a senior figure at the family office, W5 Group. Winter talks about the investment views and strategy of W5 Group, and what that says about broader developments. The editors are pleased to share these comments; the usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com if you wish to respond.

In the US, colleges and universities have seen strong enrollment growth since the pandemic. This growth has been challenged by historically limited new supply of rental units. As an investment opportunity, student housing makes a compelling case, as it has shown resilience in economic downturns. However, the great return is not without risk. Here’s what potential investors need to know about this unique real estate trend.

The student housing landscape
With 22 million university students in the US, the need for rental housing serving this demographic is considerable. Meanwhile, the country’s 175 largest universities can only provide accommodation for 22 per cent of undergraduates, creating a pressing need for additional housing from the private sector. Students typically rent off-campus properties by the bed for 12-month minimums. Parents must guarantee leases, which helps ensure a reliable stream of income for property owners.

Key trends in today’s student housing
To attract a deep pool of prospective renters, today’s student housing must be convenient, innovative, and environmentally conscious. Convenience equals proximity to campus (and desirable locales) because the shortest commute is the best commute. To be truly innovative, property owners need to include state-of-the-art shared amenities, smart building solutions, as well as co-living spaces. Finally, ESG initiatives demonstrate environmental sensitivity, and contribute to healthy communities within each property. 

Investing for outcomes
As with any investment class, student housing comes with rewards and risks. On the plus side, the potential exists for above-average returns and steady cashflow. Student rental prices continue to be supported by a glaring mismatch between the supply and demand of purpose-built housing. With average occupancy rates of 95 per cent, demand shows no sign of abating. At the same time, rising construction costs and high interest rates have conspired to constrain supply. 

The pronounced shortage of student rental housing has boosted rents in addition to property values. At the 200 largest US universities, average rents increased approximately 7 per cent year-over-year through Q1 2023. Student housing tends to mirror multi-family, with rents re-setting each year. However, an historical cap rate spread of 25 to 50 basis points has given investors in student housing an advantage, both in terms of better entry prices and higher cash yields.

Investing in student housing is not without risk. Higher interest rates could depress property prices, as could a serious recession. Demand for rental units could suffer if enrollment growth tapers off, and supply might increase as more investors enter this segment of the housing market. No one has a crystal ball, of course, but investors should be aware of these potential pitfalls. 

What investors need to know
Individuals and institutions considering an allocation to student housing should think about their short and long-term goals. From a conservative standpoint, it’s best to assume that any capital appreciation will take years to play out, whereas properties can generate positive cash flow much sooner. 

Investors may decide to seek out an experienced partner that is familiar with this space. At W5 Group, our extensive network and research-driven approach provides a strategic advantage in identifying and acquiring attractive student housing opportunities. Our investors benefit from our strong relationships with sponsors, investment managers, lenders, brokers, consultants, real estate managers and other private and public owners. Most importantly, we conduct substantial due diligence before putting in an offer on any property.

The road ahead
Once a niche corner of the real estate market, student housing investments have gone mainstream. W5 Group has established a niche within the niche by focusing on upscale student housing with 5-star hotel-like amenities delivered at an affordable price. As commercial property broker JLL noted in early 2023: “The fundamentals of student housing have never been stronger, which is why capital is flocking to the asset class.” Transaction activity has soared over the past cycle, punctuated by Blackstone’s $13 billion take-private of American Campus Communities (ACC) in April 2022. With greater institutional interest, investors now benefit from even better liquidity.

In the years ahead, some student housing investments will perform better than others. Here at W5, we are focused on the so-called Power 5 schools – those in the top five football conferences in the US. These schools, and especially those in Sunbelt markets, have recorded disproportionately strong enrollment growth in the aftermath of the pandemic – the result of better weather, improved lifestyle, overall migration trends, and stronger brand recognition. 

Our forecast for student housing – particularly in these markets – is sunny indeed. Investors should reap the benefits.