Student Housing's Comeback

The past two years have been a challenge for many in the student housing sector. When America's colleges and universities shuttered and moved to online classes, student housing suddenly became something that many undergraduates already had back home.

Now that most schools are operating at full capacity once again, things are looking up. University applications for the 2021–2022 school year showed a strong, 13.2% increase compared to the 2019–2020 year, Forbes reported, with a notable 31% jump for international applications. For the student housing sector, that's a huge potential gain, as international students unsurprisingly lease a proportionally larger share of apartments than domestic students.

Major Investment Surge

Alongside these positive trends in applications — and subsequently admissions — are some strong indicators that the student housing commercial real estate sector is alive and well. Last year, student housing investment sales hit the $9.6 billion mark, more than double the $4.5 billion reported in 2020, according to a Berkadia outlook for this year.

Why the large increase? One factor would be the diminishing returns in the traditional multifamily sector, the report notes, citing Real Capital Analytics and CoStar data:

With conventional multifamily yields compressed to historic lows, the student housing industry offers some of the best risk-adjusted returns in any sector of real estate.

As investment volume has grown, so too has pricing per bed. Last year's sales mark an all-time high of nearly $85,000 per bed. This marks a strong 9.2% uptick compared to 2020, but even more significant is the 80.7% rise over the past decade: In 2011, sales prices averaged $46,931 per bed.

Although cap rates in the student housing sector are shrinking — similar to trends seen throughout all types of multifamily assets — they still clocked in at 40 basis points above the asset class average, 5.1% in 2021 compared to market-rate multifamily's 4.7%. And the spread is only increasing, widening by 10 basis points compared to 2020.

Of course, location is everything, and in student housing it's no different. Cap rates for properties near Power Five schools averaged 5.0%, compared to a 5.3% yield for all others.

Changing Investor Profiles

In 2018, nearly two-thirds of student housing acquisitions involved institutional investors. Last year, private buyers accounted for close to 60% of all investment activity. With international investment falling in 2021, private investment has appeared to fill the void.

The top investors last year, however, remained major investors with long histories in the sector. In first place in Berkadia's report was Scion, followed by Harrison Street and GSA.

Development Activity Heaviest in the Southeast

Student housing construction has slowed. Although more than 61,000 beds were underway across the country as of the end of January, this marks a significant fall from the more than 100,000 beds under construction at the same time in 2020.

The most activity, far and away, is in the southeastern U.S.: RealPage Analytics pegs the figure at 25,775 beds, or 42% of the nationwide total. When looking at projected enrollment figures for the next five years, this is validated by anticipated surges in student populations in Florida, Georgia, and North Carolina.