Student housing investment sales ended up with a relatively strong year in 2022. The industry saw a total volume of $22.87 billion; removing the ACC/Blackstone take private transaction, the industry had $10.07 billion in sales, according to CBRE. That second number is just slightly under 2021’s total of $10.17 billion in investment sales. However, taking a deeper look, more than half — $6.37 billion — of sales occurred in the first half of 2022, with $3.7 billion trading in the second half of the year. In 2021, the opposite occurred, with $2.52 billion occurring in the first half, when the industry was recovering from COVID, and $7.65 billion occurring in the second half.
Fundamentals for student housing are incredibly strong. Pre-leasing rental rates are at record high numbers and occupancy is also very strong, since there hasn’t been much supply added in many markets over the past two years. According to Berkadia’s 2023 Student Housing Report, the average price per bed in 2022 was $99,937, a rise of more than $15,000 from 2021 and the highest on record for the industry. The average cap rate for transactions in the student housing industry was 4.9 percent, compared to 4.6 percent for market-rate multifamily, according to Berkadia’s report.
“The first and second quarters of 2022 were the strongest seller’s market we’ve seen in student housing history, so 2022 started out as anything but slow,” says Austin Repetto, principal of TSB Realty. “Increasing interest rates during the second quarter certainly changed the mood, but properties under agreement still closed in the third quarter, including the historic Blackstone/American Campus Communities deal. The sentiment at the end of the year makes it feel like 2022 was slower than normal, but it really wasn’t.”
Investment sales activity continued to slowdown toward the end of 2022 and beginning of 2023, say industry executives. The leading cause was rising interest rates, which impact the buyer’s ability to finance an acquisition at attractive cash flows.
“In January 2022, the Fed Funds rate was zero and the yield on the 10-year Treasury was 1.75 percent,” says Kevin Larimer, senior managing director with Berkadia. “By the end of the year, the Fed Funds rate was over 4 percent and the yield on the 10-year Treasury was 3.5 percent having come off its high of 4.25 percent in October. These are huge percentage increases in a very short period which naturally is going to disrupt transaction activity.”
The change in interest rates also affects a buyer’s ability to finance in the near term, says Jaclyn Fitts, executive vice president, institutional properties and head of national student housing for CBRE Capital Markets. Buyers who are dependent on financing can have issues getting loans to underwrite to their proformas.
“Lenders will only size loans based on current rent rolls,” says Fitts. “With such strong rent growth factored into Year 1 underwriting, buyers are getting penalized for not being able to maximize their loan proceeds. The fundamentals of student housing have held up so well; I think we will see a big push to market assuming that buyers will be able to get their loan sized on the final rent roll.”
The largest transaction in the history of the industry — Blackstone’s $12.8 billion take-private acquisition of American Campus Communities — closed in the third quarter of 2022. However, other major deals took place during the year. TSB sold more than $1.3 billion in student housing transactions, and others reported similarly strong sales volumes during the year.
Why? Because investors are hungry for student housing properties.
“Investors — especially those who operate in more than one asset class — are seeing such strong fundamentals in student housing that they would like to be able to buy more in the sector,” says Fitts. “Across the board, we have seen a strong interest, even from cash-on-cash buyers.”
However sellers aren’t quite ready to bring properties to market, fearing they will be asked to revise pricing.
“Deal volume is way down in 2023 as the bid/ask spread between buyers and sellers has never been wider,” says Isaac Sitt, co-CEO of New York City-based owner Vesper Holdings. “Solving to acceptable acquisition return levels is much more difficult when borrowing costs rise so dramatically. Cap rate expectations for new acquisitions have risen, but sellers have been slower to reduce sale pricing.”
With financing rates high, many buyers have had to alter their expectations for returns.
“There is still plenty of capital looking at deals, but it’s more challenging for investors to achieve their yields,” says Larimer. “Investors focused on total return are more competitive as the extremely strong operating fundamentals of student housing help their underwriting. Investors focused on cash yield are having a tougher time as the higher cost of debt capital is negatively impacting initial cash returns.”
Because pricing was so strong at the beginning of 2022, many sellers still have that mindset when it comes to valuing their properties. The market, however, has changed.
“There are those sellers out there with unrealistic pricing expectations from early 2022 that will not end up selling,” says Sitt. “On the other hand, there are some sellers that need to transact because of expiring debt or the expiration of their hold period. They are more likely to price the asset based on the current interest rate environment. If assets are priced correctly, there is still plenty of capital looking for a home in the student housing sector.”
While there is investor interest, there has been a lack of product for sale during the first quarter. While there has been some softening in the overall conventional multifamily market, that has not occurred with student housing due to the strong pre-leasing and lack of new supply in many markets. Student housing is also continuing to catch up with rent growth over the past few years.
“Student housing has very strong fundamentals at its back to continue strong operational trends for a few years,” says Fitts.
Fitts and her team marketed three portfolios containing 19 properties during fourth quarter 2022. Of those 19 properties, 63 percent of them were sold, with a few more under contract as of the end of January 2023. A number of those were loan assumptions.
“The ability to transact now with loan assumptions is a really good way to sell a property,” says Fitts.
Adding to that lack of supply is the fact that many properties that delivered in 2021 and 2022 are not pressured to sell because the properties are operating so well.
“The pace of leasing is the best it has ever been, as is rent growth,” says Larimer. “Developers are content to focus on operations, growing revenue and net operating income. We expect most to continue to be patient and strategic in timing their exit.”
Many industry players believe that circumstances may be changing as the industry rolls on towards fall and 2023-2024 rent rolls become set.
“The merchant developers that delivered in 2022 will look to execute a sale in 2023, and some are already in process,” says Repetto. “Developers will most likely not like the debt options available to them on a refinance as their construction debt continues toward its maturity and will view a sale as the best course of action.”
“We have been advising our clients to wait to go to market, especially if they are anticipating very large rent growth going into the 2023-24 academic year,” adds Fitts.
Changing the Tide
Because the student housing sector has seen such robust investment sales activity over the past five years — with a brief exception during the second and third quarters of 2020 due to COVID — the past three quarters have felt incredibly slow moving. But that is expected to change once sellers realize that market pricing is changing. Many in the industry feel that that the bid/ask gap will tighten once properties transact in the first and early second quarters, revealing realistic pricing.
“It’s a snowball effect,” says Repetto. “The properties we have in the pipeline to sell in the first quarter of 2023 will provide evidence to the investment committees of market pricing. Then add in the anticipated decrease in interest rates in the third quarter and the strong pre-leasing velocity and rental rate increases over the 2022-2023 academic year. All these factors should lead to a significant amount of volume in the second half of 2023 for the entire student housing sector.”
Rising rents and occupancy should also help the market overcome pricing obstacles.
“NOIs will be dramatically higher via huge rent growth and high occupancy,” says Sitt. “This will help alleviate some of the bid/ask spread between buyers and sellers.”
“Investors need evidence that Treasury yields have peaked, which would also indicate that the Fed is winning its battle with inflation,” says Larimer. “This would provide clarity on the depth and likely duration of any potential recession. We are cautiously optimistic this evidence will present itself in the first half of the year.”
Investment sales executives say they are already seeing some signs of increased activity in the market. While many potential sellers are usually underway with pre-listing activities ahead of InterFace Student Housing — where a lot of deals are marketed — executives say that this year is a little more muted.
“Broker opinion of values are picking up but some of this is just pricing discovery,” says Larimer. “The pipeline of available assets will be less than we normally see at InterFace Student Housing, but we anticipate the second half of the year will be robust due to pent-up demand.”
This article was originally published in the January/February issue of Student Housing Business magazine.