Uncertainty In Student Housing CRE Market Prompts A Faster Flight To Quality

Not knowing if colleges will see student density levels decline or more students remain off campus, the entire student housing landscape shifted on a dime in March. As colleges try to figure out what the fall semester will look like, and student housing landlords determine how to keep students who return to school socially distanced, investors are hunkering down with fewer, and higher-quality, transactions.

JLL's student housing team expected heavy sales transaction volumes throughout 2020. The company had about 60 active student housing projects going to market prior to the coronavirus pandemic, but most of those ended up on hold when the virus struck, JLL Student Housing Capital Markets Director Teddy Leatherman said while speaking at Bisnow's The Future of Student Housing webinar.

The coronavirus pandemic sent millions of college students home, raising questions about what on-campus living will look like in the future. 

"I see classes being different. I see things [such as] maybe they are staggering days [of attendance] by level of freshman, sophomores, juniors or maybe attending campus at different times of the week and different hours of the day," Texla Housing Partners CEO Roger Phillips said. 

"That doesn't even touch upon what the residence halls might look like. They are going to be challenged like the rest of us with spacing, and what does a traditional dorm look like now?"

University of Houston Director of Residential Life Antonio Pee admits these are trying times for universities, but said flagship Texas universities will most likely roll out their post-coronavirus plans for the fall in the coming month. 

"It's a lot of uncertainty that's happening right now on the campuses," Pee said. "Administrators are running four, five, six, seven different scenarios on how you get through a successful semester with safe students while keeping the enterprise financially viable."

Investment sales professionals are having to test different scenarios, too, and get creative to get deals done.

While JLL's student housing team is still active in the joint venture equity placement side of the market, getting those deals done has changed with capital demanding more in terms of underwriting, Leatherman said.  

"Pre-COVID, there was so much capital for student housing you didn't have to get that creative to get a joint venture," Leatherman said. "But post-COVID, we have had to come up with some pretty creative structures to get these done."

Investment sales pricing for student housing also underwent a quick transformation. 

"The majority of our sales transactions have been put on pause, but the discount for post-COVID pricing has been somewhere between 7% to 12% and that is driven one-thirds by capital markets, or the cost of capital, and two-thirds by changing in underwriting," Leatherman said.

On both the investment and construction side of the market, analysts see a stronger focus on quality student housing assets.

Capital providers want Tier-1 schools, best-in-class operators and phenomenal locations, Leatherman said. 

"At Harrison Street, the focus is on institutions that we believe can maintain and grow their enrollment," Harrison Street Director and Head of Education Real Estate Justin Gronlie said.

"It means [the schools] are selective or they are geographically located in an advantaged way, which may mean increased high school graduation rates [in the area], [strong] demographic trends and proximity to a large MSA." 

As far as development activity, it will remain unchanged for a while but experience a drop-off in the fall of 2022, Gronlie predicts. 

The recovery in student housing itself could take anywhere from 12 to 18 months, Leatherman said.