With the big splash of Greystar purchasing EdR in 2018, it has put a national spotlight on the student housing industry. It seems like I have been fielding a few calls every month with another company interested in investing, owning or managing student housing assets. Many of the current student housing investors, owners and operators know what a tough business it can be, especially on the operational side. I think most owners and operators would agree that purpose-built student housing properties operate differently from a conventional market-rate apartment property. So, with little to no student housing investing, owning or operating experience, why are so many new companies and investors looking into this assets class?
Sure, my phone has been ringing more with companies interested in student housing. But admittedly, that’s probably not the best indicator of the industry’s increased interest in the space. Empirical data from Real Capital Analytics® (RCA) does, however, indicate increased investor interest in recent years – more student beds are being bought and sold than ever before. More than 43,000 beds changed hands each year since 2015, with the peak of 62,600 beds seen in 2016, according to RCA. Prior to 2015, fewer than 33,000 beds were bought or sold in any year since 2001, with the average over those years at only 17,800 beds.
Not only have there been more transactions over the past four years, but the price that buyers are willing to pay has jumped. The average price per bed sold in 2018 surged to $226,500, a 71% increase from 2014. With more transactions and higher prices, total transaction volumes have more than doubled over the past four years.
As you can see from the chart above, the increase in transactional volume really started in 2015 with the first large student housing purchase. That year, private equity firm Harrison Street Real Estate Capital acquired Campus Crest Communities, one of the three publically traded Student Housing REITs at the time. And although the $1.9 billion acquisition price accounted for a significant chunk of the deal volume that year, the $6 billion deal volume in 2015 was nearly identical to the combined total of the previous two years. This really started to signal a growing interest in student housing by institutional investors and non-traditional student housing companies. From there, transaction volumes only went up, topping $11 billion in 2018.
What’s driving the sharp rise in sales volume and price per unit over the last four years? To understand possible factors, it’s helpful to look beyond the student housing space, as trends in other real estate sectors – particularly conventional apartments – appear to be an influence.
Rental housing in general has fetched higher returns in recent years than other real estate groups, which has attracted additional capital to the sector. Though Harrison Street’s portfolio, for example, included some student housing prior to the Campus Crest acquisition, the firm’s holdings were concentrated in the education, health and storage real estate sectors. The purchase of Campus Crest’s 38,000 beds grew Harrison Street’s student portfolio to 76,000 beds, according to a news release announcing the acquisition.
Greystar’s purchase of EdR represented the big conventional apartment firm’s first foray into student housing. Greystar, which had 435,000 conventional units under management at time, gained 42,300 student beds with the student housing REIT acquisition.
In addition to higher returns, investors are finding it more difficult to deploy capital as the cycle lengthens, particularly in the conventional apartment space. It’s probably not a coincidence that the spike in student housing transactions occurred at the same time new conventional apartment supply began to accelerate – eventually reaching multi-decade highs – and pricing for conventional units jumped, causing cap rates to compress to record lows. Conversely, student housing supply levels dropped off in 2015.
From the chart below, you can see that apartment transaction volumes also picked up in 2015. But from there, volumes have essentially plateaued as prices keep rising.
The increased competition for multifamily assets and the late stages of the apartment cycle are making many non-traditional student housing companies take a look at student housing assets, creating more competition. Not to mention many of the international wealth funds looking to invest in U.S. student housing.
Another factor that could be increasing the appeal of student housing, in particular, is a “recession resistant” perception among industry professionals. The consensus view among economists is that the U.S. is headed toward an economic recession by 2021. Though job growth and all sorts of other economic metrics that fuel revenues in other real estate sectors fall during a recession, the primary demand driver for student housing – college enrollment – actually increases.