The Impact of New Supply on Student Housing Markets

While supply has moderated nationally from peak levels in 2013 and 2014, some university markets have experienced increased new supply over the last few years. How that new supply impacts a market’s performance varies by university and depends on several factors.

At the universities below, the total of student housing beds delivered in 2015 and 2016 and anticipated for 2017 is over 2,000. About half of these universities are experiencing positive rent growth and half negative rent growth. Only one-third have prelease numbers ahead of the national average, though some are later-leasing markets.

When analyzing a university’s performance, it’s difficult to base it solely on current leasing trends and rent growth. Many factors can play into performance of student housing properties. With that being said, it’s important to keep in mind that trends not only vary by individual university, but by individual asset as well. This analysis is only taking into consideration current performance standings.

Texas State University

From this set of universities, Texas State ranks No. 1 in terms of rent growth. Same-store properties are averaging $613 per bed for Fall 2017, up 4% from Fall 2016. Most properties are experiencing positive rent growth, even those located more than one mile from campus.

Texas State had 1,700 off-campus beds delivered in 2015 and 2016, with nearly 650 beds scheduled to deliver this year. But unlike some other universities on this list, more than 15,000 off-campus beds existed before 2015.

What has attracted investors and helped existing properties sustain positive results is the consistently growing demand. The university has experienced positive enrollment growth for nearly 20 years, averaging 3.4% annually, a total growth of more than 18,000 students.

University of Houston

The University of Houston only recently moved into the top ranks for most new supply, with 465 beds delivered in 2016 and more than 1,500 expected to deliver this fall. Only 1,200 purpose-built beds were in the market before 2016. Existing on- and off-campus supply captures only about 26% of students.

The university’s enrollment has surged over the last few years, spurring an increase in supply to make up for the lack of purpose-built housing in the market. Enrollment has grown from 39,540 students in 2013 to more than 43,000 in 2016. This increase in demand is attracting developers to the market. However, construction delays could be a concern, given the recovering economy and shortage of construction labor in Houston.

Baylor University

Baylor University ranks high both in terms of most supply over the last few years and new supply anticipated for Fall 2017.

More than 4,300 off-campus beds have been delivered near Baylor during the current cycle, with 1,500 of those coming to market this fall. However, only 3,300 off-campus beds were built in the more than 20 years prior.

In terms of demand, enrollment growth has averaged 1.5%, or 215 new students, per year since 1995. In Fall 2014 and 2015, the university experienced its highest growth since at least 2001, with more than 500 new students added each year. New supply has been in line with new demand, which has allowed existing properties to maintain momentum despite the volume of supply. In addition to prelease averaging over 900 bps ahead of last February, rent growth is averaging above 2% for new Fall 2017 leases.

Performance is solid, but if supply continues at the same pace without corresponding growth in demand, existing assets could see some softening in the coming years.

University of South Carolina

There has been sufficient development activity at the University of South Carolina over the last few years, with nearly 3,000 off-campus beds delivered from 2014-2016. On average, supply has outpaced demand, but more than 40% of students are living in something other than purpose-built student housing.

Rent levels are growing for most properties compared to last fall. However, leasing velocity is slowing for many properties in the market. Prelease is averaging 54% as of February, down more than 600 basis points (bps) from last February. Older assets, especially those located more than one-half mile from campus, sustain the most impact from new supply.

Mississippi State University

Enrollment growth at Mississippi State University has been moderate, on average, despite fluctuations in growth a few years ago. Most of the off-campus, purpose-built beds came to market this cycle, with 62.8% built since 2011, including the near 700 beds expected to deliver this fall. However, existing supply only captures around 58% of students.

New supply is relatively spread out around campus, so it is not impacting the market in the same way it would if the properties were built closer to each other. Still, a few properties that are priced at the top of the market have had to drop rents in order to continue momentum this leasing season.

University of Nebraska–Lincoln

The University of Nebraska–Lincoln was a hot topic last year because of the volume of supply being delivered. As a result, UNL’s performance was and still is slowing.

Purpose-built student housing properties are averaging around $585 per bed, down 8.5% from Fall 2016. Since much of the existing supply in the market was built within the last few years, rents are much higher than many student housing markets in the Midwest–West North Central region. However, properties that had the highest rent levels in 2016 had to drop rents significantly for the upcoming fall, causing the wide range in prices at UNL to narrow.

Leasing velocity is also down year-over-year, at least based on the performance of the two same-store properties in the market. The properties were averaging 34% leased as of February, down 460 bps from last February. However, prelease is still ahead of two years ago, when it averaged only 28.2%.

Additionally, on a non-same-store basis, properties were averaging closer to 45% leased in February and are showing more positive signs with March figures. This could signal a potential rebound in performance later in the leasing season or next fall, especially with no new supply being delivered in 2017 or in the pipeline for 2018.