Rent Growth, Waning Supply Draw More Investors To Student Housing

Multifamily has been drawing the largest share of investment dollars of any commercial real estate sector this year amid a difficult capital markets environment, and one segment within multifamily has emerged as an especially attractive pearl of opportunity for many investors.

The student housing sector, with double-digit rent growth and occupancy in the mid-90% range, is attracting a new, diverse array of debt and equity investment that is only expected to increase.

Industry executives at Bisnow’s Mid-Atlantic Student Housing Summit, held last week at The Westin Georgetown, spoke about the increasing appeal of student housing and the fundamentals that are poised to push the sector even higher on lenders' and buyers' wishlists.

“You're also starting to see a lot more financing outside of maybe Fannie Mae and Freddie Mac, which used to be pretty dominant in the space,” Walker & Dunlop Senior Director William Shell said.

“Life companies have really stepped up. Banks were pretty dominant over the last few years, but that's exciting for me, because there's alternative sources to find financing,” he added.

Capital allocation in the student housing sector from private, institutional and cross-border investors has reached a record high this year, according to the Newmark student housing team's midyear report, and it is only expected to climb higher. 

The report says the investors recognize student housing as a “defensive” sector amid economic downturns and “are drawn to the attractive yield it offers compared to other asset classes.”

“Student housing transaction activity is expected to be robust in the second half of 2024 as domestic and global institutional and private investors continue to recognize the sector’s strong growth potential and secular tailwinds,” the report says.

In the first half of 2024, 78 properties sold for a combined $2.8B, representing a 10% year-over-year increase, according to Newmark. 

Annual new supply of student housing is still 20% below prepandemic averages. This helped effective rents between the fall of 2022 and 2023 increase by a record 11%, according to the report, with the core 175 colleges RealPage tracks coming in even higher, at an 11.3% increase.

“That’s a strategic opportunity for banks,” United Bank Market President LeVar Crooms said of the rent growth.

United Bank is focused on larger state schools in the major athletic conferences, those that are in “quintessential” college towns with limited shadow inventory, and on student housing properties that are walkable to campus.

“From a strategic standpoint, we're chasing the population growth and enrollment trends,” Crooms said.

Acumen Cos. Chairman A.Z. Abiud said banks’ narrow focus on Tier 1 schools and assets so close to campus leaves a financing gap for the rest of the properties looking for capital, like those near Tier 2 schools or schools with fewer than 20,000 students enrolled.

His firm launched a $450M fund this year to take advantage of “untapped potential” in the next tiers of the student housing market. 

“They need to transact,” Abiud said. “So there's an opportunity to buy those assets, if you're entrepreneurial, versus build them.” 

Walker & Dunlop's Shell said he has seen more foreign capital coming into the student housing market as well.

Newmark’s student housing group reported that 22% of the capital invested in student housing in 2023 came from foreign investment, an 18% increase compared to the year prior. 

By contrast, foreign investment makes up just 5% of investment in traditional multifamily properties, it said. 

“Record rent growth, strong occupancy rates and historically low supply in the student housing continue to attract overseas investors, as funds shift equity away from more competitive multifamily and industrial asset classes,” the report says.

While the surge of investment interest is positive for the sector, panelists warned that the space is materially different from multifamily, so it is important for new players in the market to know what they are getting into. 

“It’s totally different than multifamily,” Abiud said, pointing to the “dramatically” different nature of preleasing that almost solely takes place during the summer before school starts. 

Financing structures are also different. Greystar Director of University Partnerships Jared Stanfield said student housing developments on campuses are mostly ground leased because universities don’t want to let go of their land. 

He also said that about 60% to 70% of the on-campus housing Greystar develops is financed with tax-exempt bonds, which he said are seeing a strong market right now.

“So there's a lot of activity, a lot of interest in on-campus student housing in the tax-exempt bond market, and that's really helped — in spite of interest rate challenges — allowed us to really continue to develop on campus with our partners,” he said.

CORRECTION, NOV. 18 12 P.M. ET: A previous version of this article misattributed comments that were made at the event by Walker & Dunlop Senior Director William Shell. It has been updated.