Student housing – long a niche sector within the broader multifamily universe – is gaining momentum with institutional investors seeking to diversify their multifamily portfolios. But as the popularity of the asset class grows, lenders are expecting tighter spreads for a property type that has remained liquid despite the volatility in today’s market.
A slowdown in investment sales activity may have set in by the latter part of 2022, but student housing transactions continued to be completed. According to data from brokerage JLL, the sector saw an all-time high in transaction volume in 2022, with $18.9 billion of deals completed. By comparison, there were about $11.5 billion of transactions completed in 2021, with the brokerage firm tracking significant cross-border investment from the Middle East and Singapore.
Volume of completed US student housing sales in 2022
Volume of completed US student housing sales in 2021
Percentage of cross-border capital behind transaction activity in 2022
Percentage of cross-border capital behind student housing transactions from 2012 to 2016
Increase in student housing rents from 2021 to 2022
The activity reflects the broader fundamentals in the market, says Bill Lewittes, managing director and head of loan originations on the debt team at Kayne Anderson Real Estate Advisors. Though college enrollment dipped during the pandemic, freshman enrollment in 2022 fall is up 4.3 percent from the previous fall, according to a report from National Student Clearinghouse, and the supply of student housing properties hasn’t been able to keep up with demand.
Lewittes is unequivocal about the prospects: “Pre-leasing numbers are through the roof, rent growth is through the roof, demand is through the roof… [The] fundamentals are astounding.” Lewittes, who has spent the past eight years focusing on student housing lending at Kayne Anderson, has never seen the sector like it is today.
The demand for on-campus student housing was already strong before the pandemic, but has only grown further as a larger student body looks for housing around campuses. “A lot of the bed spaces that the schools were cramming into their on-campus supply have now been pushed off campus,” says Lewittes, adding that schools have been able to increase the enrollments by leveraging the hybrid learning model they invested in during covid and ended up also spurring the number of students who need off-campus housing in surrounding school areas.
“Over the past 10 to 15 years, you’ve seen the ‘delta’ in the perceived risk profile of student [housing] versus multifamily compressed considerably,” says Lewittes. He notes that the student housing sector is not seen as quite so esoteric as it used to, because people are taking time to understand the risks and quantify those risks appropriately.
Last April, Blackstone acquired all outstanding shares of American Campus Communities, the largest developer and operator of student housing in the US, with an all-cash transaction that totaled approximately $12.8 billion. The deal marked a transitional period where the sector became more institutionally owned as it gained popularity among investors.
“Over the last couple of years, you’ve seen a good bit of momentum behind student housing viewed as more of an institutional asset class than it was previously,” says Kyle Jeffers, senior managing director and co-head of originations at ACORE Capital.
As the sector becomes more mainstream, the compression of spreads may well follow. Nitin Chexal, CEO of Palladius Capital Management, an Austin-based real estate investment manager, envisions both the interest rate spreads and cap rates in student housing lending to compress over the next three to five years.
“Historically, lenders viewed student housing as having more risk than multifamily, because the space was less institutionally owned, and the operating model of student housing, which is different than [that of] multifamily, was also less understood,” Chexal says.
He notes that student housing lending is still trading 75-100 basis points wider than multifamily, meaning debt spreads have not compressed, though the sector is more institutionally owned today. Chexal believes this trend is starting to change. “I think over the next three to five years, [the market] could see those spreads compressing to look more like multifamily debt.”
However, analysts still recognize the growth potential of the student housing sector, reaffirming fundamentals on the ground. ACORE’s Jeffers says inflation will allow housing owners to raise rents that offset rising operating costs. Bridge lenders like ACORE would also take advantage of the entry opportunities when assets need capital during a transitional period.
In addition, more alternative lenders could turn to student housing as a niche investment to take more market share. “I don’t think you’ll see the pure multifamily operators jumping in the space, but you will see institutional capital teaming up with knowledgeable operators in [student housing],” says Melissa Farrell, managing director and the head of US debt originations at PGIM.
Still, market participants see a strong near-term outlook. “A lot of markets haven’t hit their pre-covid high watermarks in terms of rent, so the asset class continues to experience robust top-line growth relative to multifamily, which [already] saw that growth happen during the pandemic,” says