The fourth quarter of 2021 was one of the most active periods for investment sales in the history of the student housing sector, according to a number of sources SHB spoke with for this article. In addition to some major acquisitions by large investors, an influx of new capital to the industry propelled deals in the second half of the year. The industry had a total volume in 2021 of just over $10 billion, according to CBRE. Approximately $5.52 billion of that volume was sold in the fourth quarter of 2021.
Harrison Street was the sector’s largest seller, shedding $1.9 billion of assets in separate portfolio sales to GSA and The Scion Group. The Scion Group — along with its capital partners — was the largest investor in the fourth quarter, acquiring just under $1.6 billion worth of student housing assets in various partnerships with institutional capital providers.
“Our investment activity was partly a reflection of the student housing sector’s performance strength through COVID,” says Avi Lewittes, chief investment officer at Chicago-based Scion. “The sector emerged from the pandemic with a reaffirmation of its solid fundamentals, especially its defensiveness, relative to other asset classes which have not fared as well over the last two years.”
Scion acquired $1.2 billion with Brookfield and about $400 million in student housing assets with PGIM. In all, the company acquired just under 20,000 beds in 32 properties, representing 17 new markets for the company.
“The pandemic provided an opportunity for the institutional marketplace to be reminded of what a great sector student housing represents among the broader residential verticals,” says Lewittes. “Scion and other major players have experienced more institutional capital interest than ever before. That has helped to propel our business plan over the course of the past 18 months. We established new capital ventures with some of the world’s most sophisticated sources, including Brookfield and PGIM.”
Fourth Quarter Flies High
In addition to Scion’s large purchase, there were smaller portfolio sales and many individual sales that may have flown under the radar during the fourth quarter. CBRE reports that $6.3 billion of individual transactions took place in the sector in 2021, while $3.76 billion took place in portfolio transactions.
CBRE represented just over $600 million in student housing investment sales transactions during the fourth quarter of 2021, according to William Vonderfecht, senior vice president and co-leader of the student housing team at the firm. For the industry overall during the fourth quarter, removing the $1.9 billion sold by Harrison Street, the volume outpaced every prior quarter for the past three years, according to CBRE. Fourth quarter 2021’s sales were 1.6 times larger than the fourth quarter of 2020 and the fourth quarter of 2019.
“Our team, as well as the sector overall, had an extremely heavy fourth quarter,” says Vonderfecht, whose team closed 15 transactions at an average cap rate of 4.5 percent during the quarter. “Like 2020, sales in 2021 were heavily weighted in the fourth quarter because of the large portfolio transactions.”
Cap rates are lower for the student housing industry overall, driven by a number of factors. There is a large amount of equity capital chasing student housing deals, driven by the recession-resistant nature of the market. CBRE reported in its ‘Year-End 2021 Student Housing Market Overview’ webinar that the average cap rate — for all classes of student housing product — in 2021 was 5.07 percent. The lack of high quality assets available in Tier 1 markets is forcing interested investors for those properties to bid higher, pushing cap rates down. Additionally, market fundamentals are incredibly strong headed into 2022.
“The lack of quality offerings has caused more cap rate compression,” says Donna Preiss, founder and CEO of Raleigh, North Carolina-based The Preiss Company, which executed more than $1 billion in transactions in 2021. “Desirable assets are being recapitalized and less desirable assets are finding their way to the market at low cap rates. Cap rates have tightened due to demand, cheap debt and a scarcity of high quality offerings.”
During its webinar, CBRE presented survey results from student housing investors. For 2022, 46 percent of investors believed that cap rates would remain the same for student housing assets, while 38 percent of respondents thought cap rates would decrease over the next year; only 16 percent thought cap rates would increase.
Driving these transactions — and thus the lower cap rates — in fourth quarter 2021 were strong pre-leasing and NOI leading into the 2021-2022 academic year this past fall. In fall 2021, occupancy was 4.97 percent above fall 2020, according to CollegeHouse, which also reported in early February 2022 that pre-leasing for fall 2022 was 6.19 percent ahead of where it was in February 2021 at an average rent increase of 2.84 percent. The pre-lease rate is 2 percent above where it was in February 2020, pre-COVID, pointing to a healthy recovery for student housing in fall 2022.
“The investment community witnessed measurable pre-leasing velocity year-over-year comparative to the COVID-laden 2020 statistics,” says Peter Katz, executive managing director, investments, with Institutional Property Advisors. “With institutional capital on the sidelines for six to nine months, sponsors and limited partnership equity elected to be aggressive as we moved through 2021. Additionally, with interest rates historically low, the market-rate arena experiencing significant cap rate and unleveraged return compression, and heightened buying demand in the sector, performing product at ‘Power Five’ conference universities was in high demand and received numerous bids on all offerings.”
As Katz points out, assets sold at very competitive pricing during the fourth quarter, and are continuing that way into 2022.
“Pricing was strong and seemed to continue a flight to quality,” says Andy Feinour, president and CEO of Atlanta-based Student Quarters. “Core assets walkable to campus in Tier 1 markets attracted the most attention and pricing really increased as competition for these assets was fierce. Pricing on other assets seems to be on an upward trend now as well.”
As examples of strong pricing, JLL closed the sale of a six-project, 544-bed portfolio at Michigan State University. The portfolio was purchased by Champion Real Estate for $42.6 million and sold by DTN Management Co. JLL also capitalized six student housing projects in various top markets for Dallas-based Fountain Residential Partners.
The numerous sources of equity active in the sector, it seems, is pushing the cap rate bar lower.
“We are seeing more new equity investors than ever chasing the space,” says Douglas Sitt, student housing specialist with Rittenhouse Realty Advisors. “This is really driving down cap rates. Stronger markets — like Clemson, Athens and Knoxville — are doing incredibly well and rent growth is strong.”
Proof that new equity is entering the space was also reported by CBRE in its webinar. The firm reported that 66 percent of student housing sales in the second half of 2021 involved new entrants to the industry.
CBRE said that 87 percent of investors surveyed preferred to acquire in Tier 1 markets. That’s evident in the pricing seen in stronger markets. Investors and investment sales brokers say that select Tier 2 and 3 markets are also doing well, but many have struggled.
“Applications have increased significantly at larger Tier 1 universities and there has been a corresponding dip in applications at Tier 2 and 3 schools coming out of the pandemic,” says Troy Manson, chief investment officer at Dallas-based University Partners. “Buyers seeking higher going-in yields, lower per bed bases and a less competitive investment market are finding opportunities in these markets. That said, there are certainly some below the radar markets with compelling fundamentals where I think all investors will play.”
Philadelphia-based Rittenhouse Realty Advisors recently listed and sold an asset in one such market, Statesboro, Georgia. The 780-bed project sold for over $40 million. Sitt says that his team had a lot of interest in the property, generating multiple bids.
Flying Into The First Quarter
With the first quarter of 2022 underway, brokers say they are seeing a lot of activity from buyers and sellers.
“You will see quite a few portfolios on the market over the next six months,” says Teddy Leatherman, senior director of capital markets at JLL. “A lot of the timing around that depends on the particular university markets and where lease up is in those markets.”
Leatherman says her team at JLL is actively working on six joint venture equity assignments, along with 10 to 15 sales assignments. JLL has student housing teams in India, Asia, Australia and the U.S., enabling the company to bring a lot of global capital to U.S. student housing investments, says Leatherman.
“We have seen some of the most compressed cap rates in student housing over the past six months,” she says. “Everyone knows that now is a great time to sell because there is so much capital chasing student housing. I don’t think I have ever seen this much capital in the space.”
CBRE is also seeing activity gathering steam in the first quarter. That’s atypical as many deals tend to start coming to market ahead of InterFace Student Housing in the second quarter.
“We usually have a slower January and February and start to see products come to market in March or April,” says Vonderfecht. “This year, sales ramped up a lot faster. We are seeing the markets lease extremely well this year, and that is allowing sellers to come to market early.”
Rittenhouse Realty is another group with a number of listings headed to market or already under contract. The firm has a project at the University of South Florida that will close in March at a price of more than $40 million. Rittenhouse also has another project at Missouri State University in Springfield that will close in the first quarter for over $20 million. It also has a $90 million project that is closing in February adjacent to the University of Pennsylvania in Philadelphia. At Syracuse University, the company has a scattered site portfolio under contract for approximately $60 million that is anticipated to close in March. In all, the firm will have over $300 million in closings of student housing properties in the first quarter.
“There is a clear uptick in the number of properties for sale to start 2022,” says Eric Frank, chief investment officer at Denver-based Cardinal Group. “We are seeing a number of portfolios and recaps in the market and it’s likely that deals will move in large blocks to start the year alongside individual transactions.”
CBRE’s student housing team is currently working on more than 50 broker opinions of value — a very large number compared to normal — to analyze properties for sales pricing.
“We expect there is going to be a lot more coming to market in late February or early March compared to years prior,” says Vonderfecht.
A Good Time To Sell — And Buy
Potential sellers aren’t all rushing to market, however, say some investors.
“Sellers are cautiously optimistic,” says Feinour of Student Quarters. “Sellers have ridden out the COVID-19 storm and values are now fully recovered and moving higher. Transaction markets are robust and there are plenty of buyers to absorb the product being offered. The question becomes do you sell now or hold on for another year or two of potential outsized rent growth? One’s view of future cap rates will certainly influence this decision.”
“Sellers are a little bit nervous about interest rate hikes,” says Ken Wellar, managing partner with Rittenhouse Realty Advisors. “That helps their decision to sell because of the timing, even though the fundamentals of the student housing assets in good markets are really strong. Owners are deciding that now is the time to sell because of those two factors, as well as the fact they can clearly make a profit now.”
Capital partners are seeking co-investors who are proven operators in the student housing business.
“A lot of domestic and foreign capital wants to find an operator to partner with in the U.S.,” says Leatherman. “They know the space is a good investment, and they want to partner with one of the best operators in the country and buy large portfolios.”
“The operational bar is higher than it has ever been,” adds Lewittes. “With asset pricing so tight, it becomes that much more important to your institutional capital partners that you are well positioned to be able to create value in the assets you are acquiring and grow cash flow through operations.”
Looking at the big picture, today’s environment is an odd mix of a buyer’s and seller’s market. Many believe that student housing cap rates are where they should be — likely based on the comparison to conventional multifamily cap rates — and that there is opportunity for profits on acquisitions. Owners meanwhile, with market fundamentals already so strong, may have made estimated proforma profits on projects already and decide that now is the time to exit properties.
“Operations have rebounded, cap rates are compressing and there are more buyers than sellers,” says Frank. “This all adds up to a great time to sell. By the same token, development pipelines remain muted and there is a clear path to continued strong rent growth, making it a good time to buy as well.”
Conventional Players Enter
The conventional multifamily market had its strongest year ever in 2021 when it came to investment sales. That heated environment has pressed cap rates so low in the sector that many conventional players are now turning to student housing.
“Historically, cap rate differences between traditional multifamily assets and student housing assets were between 25 to 75 basis points,” says Preiss. “Since COVID, the gap has grown to as much as 200 basis points. Rental rate increases for multifamily properties averaged 13.5 percent across the U.S. while they were at 3 percent for student housing, and that was aided by concessions. Buyers recognized that these disconnects will reduce.”
CBRE reports that the delta between student housing and conventional multifamily trades in 2021 was 56 basis points, the highest it has been since 2013. That spells opportunity for many conventional multifamily owners who may have missed out on the student housing wave over the past decade.
Vonderfecht adds that he is also starting to see a lot of conventional players entering the student housing market as cap rates compress for traditional multifamily assets.
“A lot of them are looking for hefty investments, targeting billion-dollar portfolios,” he says. “The new entrants aren’t necessarily the international groups you’ve seen in the past, but the domestic multifamily institutions that you know of as brand names, but who haven’t played in student housing before.”
Conversion Plays
As cap rates for conventional multifamily investment sales continue to compress, many student housing owners active in secondary and tertiary markets are putting product up for sale. With many of those projects leased to both students and permanent area residents, conventional operators are seeing the opportunity for conversion.
“In our experience, student housing in Tier 2 and Tier 3 markets is being sold to conventional multifamily buyers who will convert it to conventional,” says Leatherman, who adds her team has executed about half a dozen such transactions over the past few months. Pricing for those assets is competitive because of the attractiveness of the cost basis.
In secondary markets, student housing communities can sell at a higher cap rate than those in top tier university markets, and way above conventional multifamily product.
“Conventional multifamily cap rates are so compressed that it is not uncommon to see a conventional cap rate that starts with a 2 or 3,” says Leatherman. “Conventional multifamily investors are getting a little tired of competing for those deals. If they can buy a student housing deal at a good basis and flip it to conventional, change the renter make-up and sell, that is a really good yield.”
The Preiss Company sold seven assets in 2021 that were converted by the buyers from student housing to conventional multifamily. While that may be concerning to some, Donna Preiss says there is also a positive effect for those still operating student housing assets in the same market as conversions.
“It has a positive effect on supply for student housing,” she says.
Outlook for 2022
Many active in the student housing investment space — from brokers to buyers — believe 2022 will be a strong year for acquisitions in the sector. The first quarter is off to a strong start, and there are few roadblocks visible at this point.
“To date in 2022 investor demand from new domestic and international investors, coupled with many seasoned sponsors, appears to mirror the 2021 investment landscape,” says Katz. “This trend will continue in 2022, provided we don’t experience five or six dilutive interest rate increases.”
“I think 2022 will be a very active year,” says Lewittes. “There were several portfolios that were being assembled for sale at the end of 2021 for marketing launch in Q1 2022. We are underwriting an enormous amount of potential investment activity now. I expect that sellers are going to be excited about some of the valuations that are available in the sector. Given the cap rate compression that has persisted in the industrial and conventional multifamily sectors, some of the capital that has been allocated to those asset classes will shift and continue to fuel investment activity in student housing.”
—Randall Shearin
This article was originally published in the January/February 2022 issue of Student Housing Business magazine. To subscribe, please click here.