Real Estate
Big Trend On Campus – The Rise And Resilience Of Student Housing
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.