Investors started 2018 by enthusiastically buying student housing properties. “Now we are busy like we were in 2016,” says Travis Prince, executive managing director in the student housing group of real estate services firm Colliers International.
After slowing down slightly in 2017, buyers are again pouring cash into purchases of student housing properties. Student housing continues to perform well—strong demand is keeping properties full and investors are still finding attractive opportunities. These assets are even more attractive to investors because they have kept their value in good economic times and bad.
“We have seen stable revenue performance throughout the last recession and through this expansion cycle,” says Jaclyn Fitts, director of the national student housing service with real estate services firm CBRE. Three-quarters (75 percent) of investors surveyed by CBRE expect to increase their exposure to student housing in 2018
Recent slowdown
In 2017, deal activity in the student housing sector fell 21 percent compared to the year prior, but it was still at an elevated level historically, according to Jim Costello, senior vice president with New York City-based research firm Real Capital Analytics (RCA).
Investors spent a total of $7.7 billion to buy student housing properties in 2017. The volume was the second-highest ever for sales of student housing properties, after 2016. That year, one gigantic transaction—the $1.9 million purchase of Campus Crest Communities by Harrison Street completed—brought overall sales volume to an all-time record. Without that single deal, investors spent more on student housing in 2017 than during any other year.
Investors may be ready to spend even more on student housing in 2018. “We continue to see equity flooding into the space. Even though this is our typical slow time, we continue to see people looking for assets,” says Fitts.
Prices rise higher
Cap rates on sales of student housing properties averaged 5.9 percent in the fourth quarter of 2017, close to the levels where they have hovered over the last year. That’s down from 7.0 percent at the end of 2011, according to RCA.
Cap rates are even lower for the most prized assets. “For more than a decade, student housing cap rates were largely in the 6s, but now are regularly in the 5s,” says Fred Pierce, president of Pierce Education Properties, an investor in, developer and manager of student housing properties.
In comparison, cap rates on sales of apartment properties averaged 5.6 percent at the end of 2017, down from 6.5 percent at the end of 2011, according to RCA. “For a while, the student housing sector offered a great yield premium to apartments generally. That premium has really been squeezed,” says Costello.
Investors have been drawn to student housing by strong performance. “Investors do have a belief that student housing is recession-resilient,” says Prince.
Cap rates tend to be the lowest on sales of properties within a half-mile of the campus they serve. However, those properties now rarely come on the market. “The competition for that product type is massive,” says Fitts.
Investors are also finding opportunities to put their money into older student housing properties, further away from the campus. “There is demand for those properties too. There are students who can’t afford to live at new, pedestrian properties. They seek affordability,” says Fitts.
