Does Student Housing Create Lasting Value?
Swimming pools, private kitchens and distance to campus are some of the factors determining differences in rent levels in student housing complexes, according to an interesting piece of research presented at the NMHC Student Housing Conference in California last week.
My professional reaction to this study, the conference, and a new fund dedicated to providing support to academic researchers analyzing the sector, is that this segment of the U.S. commercial real estate market is becoming more sophisticated.
My personal reaction is “What the heck?” My Chicago college dorm was a cinder block exercise in brutalism. (Tearing it down was viewed as a net benefit to the university by some professors teaching there.) This difference between the personal and professional reaction to concepts is an issue I deal with all the time: fundamentally I am an optimist but, as an economist by trade, I look at every data point and change in the market with skepticism.
There is more capital moving into the student housing sector in this cycle and it is impacting pricing metrics. However, it is unclear whether this move is permanent because of a professionalization of the sector, or temporary, as investors chase the higher yields of the sector.
In the last cycle, as cap rates moved to cyclic low points, student housing was viewed as a riskier asset class than apartments overall and higher cap rates reflected this risk. On average cap rates for student housing were 47 bps higher in the period from Q1’05 to Q2’07. In this cycle, student housing sector cap rates have moved closer to those for apartments with only a 25 bps spread from Q1’16 to Q2’18.
The story is that as the sector became more professional, cap rates compressed to reflect improved information access, the understanding of performance, and improvements in management. This said, my skeptical economist training tells me not to accept at face value that the compression is permanent.
It is the case, though, that the student housing sector is attracting more institutional capital, particularly cross-border investment. This cross-border capital is not hot money here for a quick yield hit either. The leading cross-border investors behind acquisitions in recent years include Brookfield, GIC and Mapletree – all groups with long experience in U.S. commercial real estate investment. Furthermore, there are differences in the current cycle regarding the underlying demographic demand for the sector. As I noted on this blog in April, future demographic trends do support ongoing demand for this space.
Yes, on a personal level I do not understand the new student housing thing. In my day, student housing meant a run-down house with leaky windows and extra sweaters to stay warm. It is attracting more investor interest, however. Deal volume has been closing in on $10 billion per year over the last two years and trending this way for 2018 as well. This was only a $1-billion-to-$2-billion per year market last cycle. Clearly it is a larger, more liquid market than in the past.
