The Emergence of Student Housing as a Lucrative Asset Class
by: Ori Nozar
Over the past few years, student housing has emerged as a distinct asset class, separating itself from the multi-family sector. This shift is evident in the rise of multi-billion-dollar REITs and funds devoted exclusively to investing in student housing. Just this past year, Blackstone acquired American Campus Communities, a student housing REIT, for $13 billion (1). The popularity of this asset class is due to the consistent growth in university enrollment from both domestic and international applicants since the great financial crisis (2). In 2022, student housing experienced one of the highest appreciation, with rent growth increasing by double digits, providing the groundwork for it being the most attractive investment option on a risk adjusted basis.
Due to the pandemic, the uncertainties faced by other asset classes such as retail and office have led commercial real estate investors to focus on student housing and multifamily investments as people will always require housing. Moreover, recessions often result in increased university enrollment, as laid-off employees seek further education to improve their job prospects. Student housing investments offer unique advantages such as the ability to capture current market rents through one-year lease cycles and minimizing credit losses through guarantor requirements.
The value of a student housing property is heavily influenced by its proximity to the university, the amenities it offers, and the availability of housing near the campus (3). While flagship universities continue to expand, smaller institutions in the Midwest and Northeast are struggling to maintain enrollment levels. Some state university systems are consolidating smaller campuses into larger regional ones, such as in Wisconsin and Georgia (4). Real estate investors should be cautious of public universities’ capacity to use eminent domain and increase dormitory supply, potentially decreasing market rents. Rising rates have impacted transactions in Q4 2022 across all asset classes, leading to a cap expansion and causing sellers to be reluctant to sell at the prices buyers are willing to offer (5).
Student housing deals enjoy widespread support from various capital providers including banks, credit unions, and private capital due to their resilience. In 2022, transactions reached an annualized total of $18.9 billion, nearly doubling the previous year’s high (6). Despite rising interest rates, most lenders and capital providers are likely to continue financing student housing deals in 2023. However, loan-to-value ratios across the board have decreased compared to previous years and financing for ground-up developments came to a screeching halt.
In areas with student housing supply shortages, operators can significantly raise rents and capitalize on increased appreciation and cash returns, making these investments even more attractive to investors and lenders. The unique benefits of student housing investments support their claim as the most desirable asset on a risk-adjusted basis.
Lever Capital Partners has provided capital for various student housing projects across the United States, including ground-up development, value-add remodeling, and turnkey acquisitions. We can help source debt, mezzanine debt, preferred equity, and equity to ensure no deal or opportunity is left unexplored. Furthermore, we connect clients with capital providers, fostering partnerships between them and sponsors. In these times of high inflation and interest rates, securing capital has become more challenging. Collaborating with Lever Capital Partners can alleviate the stress of sourcing capital, allowing you to focus on executing your business plan and seizing opportunities.