Fueled by pent-up demand, the U.S. student housing investment market surged in 2022, with transaction volume increasing from $11.5 billion to an all-time high of $18.9 billion.[1] Despite a significant decrease in 2023 transaction volume to $10 billion, largely due to higher interest rates and material costs,[2] the prediction is for strong growth in the market when interest rates move lower and inflation moderates, if operating fundamentals remain strong. The industry continues to outperform other asset classes: leasing for fall 2024 was very strong, as was rent growth.
Growing Demand
In fact, the demand for student housing accommodations has exceeded enrollment growth for over a decade at large public universities, with around 250,000 students to 100,000 beds in 2023 and provision rates (total beds vs. total students) declining 22.5 percent over the past three years.[3] The shortage of student housing is partly a result of the current high interest rate environment, constraints for public finance, and increasing labor and material costs; this is even as the National Student Housing Report from Yardi Matrix reports rent per bed reached approximately $895 in March 2024,[4] with the biggest rent increases registered primarily at large public universities in the United States.[5]
The United Kingdom is also experiencing a shortage of student housing accommodations despite the increase in demand. It is reported that the national average student-to-bed ratio stands at 2.1:1.[6] This underscores the fact that while there is a continuous stream of potential customers, the housing supply lags in providing adequate student accommodations at a price point that works for many students, as unmet demand pushes rents higher.
Where the Opportunities Lie
The student housing industry has gained recognition as a profitable alternative commercial real estate investment; it is transitioning from a niche business run primarily by local operators to larger-scale firms with national reach and a pipeline of investment opportunities to meet demand from institutional investors seeking steady cash flow. These entities are increasingly investing in the student housing market, offering substantial amounts of equity and debt at a lower cost than smaller investors.
Sustained high demand, combined with the aging of many existing accommodations and their failure to meet the expectations and needs of today’s students, creates opportunities to develop, reposition, stabilize and recapitalize student housing accommodations in service to large universities. These conditions continue to attract increasing amounts of institutional capital seeking well-priced, risk-adjusted total returns averaging 9.5 percent, according to CBRE. As a clear indication of interest, investment funds accounted for 52 percent of total U.S. transaction volume in the second half of 2022.
Further, to address the gap between the supply and demand for student housing accommodations and increasing cost, universities are increasingly partnering with the private sector as part of public-private partnerships (P3s). P3s can lower the costs of development and financing as well as operating expenses, and they offer risk transfer with private sector execution; they also present an opportunity to offer student housing accommodations at lower rents.
Private developers/sponsors seek flexibility in combining the use of their own equity, third-party equity, tax-exempt bonds and/or additional public benefit incentives to achieve the lowest cost of capital and operating expenses, and often as part of a P3 with multiple stakeholders.
P3 Impact on Public Universities
Enrollment is highest at public universities with Division I athletic programs and large research programs. These institutions have complex portfolios of academic buildings, student housing accommodations, administrative buildings, parking lots and other facilities. As the quality of student housing choices increasingly affects a student’s enrollment decision and as the preference for off-campus housing continues to grow, universities must balance using their capital to build on-campus student housing accommodations or new state-of-the-art facilities to support core academic missions. In this regard, universities are increasingly seeking to facilitate student housing P3s that reduce their capital requirements and operating expenses.
For example, Drexel University’s partnership with the private sector enables a developer to use university-owned property via a ground lease to build, own, operate and market the accommodations in partnership with the university, including a joint board that regularly discusses the resources and services provided to students.
P3 partnerships not only help to offset the universities’ cost and execution risks, but enable universities to redirect their resources toward delivering a quality educational experience.
However, it’s not all good news. Overall college enrollment has been on the decline since 2010, but had an uptick in 2023. The “enrollment cliff” — caused by the decrease in the U.S. birth rate between 2007 and 2022 — may trigger a decline in undergraduate enrollment from 2025 onward, while at the same time, fewer international students are studying in the United States. Furthermore, students are experiencing more skepticism about the cost of higher education and the value that it offers. A 2023 Gallup Poll found that confidence in higher education fell to 36 percent, with the biggest factor being the cost of student debt. This impact is expected to be felt less at large, Tier 1 universities where most institutional-grade student housing assets are found.
Overall, sponsors with institutional capital and P3s offer universities the opportunity to reduce capital requirements and operating liabilities, assure long-term budget certainty, and transfer risk by accessing private-sector expertise. The biggest operators continue to grow and mature, and the industry is poised for consolidation as institutional capital allocations to niche multifamily asset classes drive capital efficiency and future growth.
—Glenn Brill is a managing director in the Real Estate Advisory group within the Real Estate Solutions practice at FTI Consulting Inc. in New York. Contact him at [email protected]. Marissa Huang is a Real Estate Advisory intern.
[1] Richard Lawson, “US Student Housing Poised to Attract More Institutional and Overseas Investors After Record Year,” CoStar (January 23, 2023), https://www.costar.com/article/432398448/us-student-housing-poised-to-attract-more-institutional-and-overseas-investors-after-record-year.
[2] “US Student Housing Market: Evolution & Opportunities,” (June 8, 2024), https://amberstudent.com/news/post/us-student-housing-market-evolution-opportunities.
[3] “Student Housing: A Sector in High Demand,” Brookfield Oaktree (June 14, 2024),https://www.brookfieldoaktree.com/insight/student-housing-sector-high-demand.
[4] “Matrix Student Housing National Report–April 2024,” Yardi Matrix (April 18, 2024),https://www.yardimatrix.com/publications/download/file/5481-MatrixStudentHousingNationalReport-April2024.
[5] “National Student Housing Report–September 2023,” Yardi Matrix (October 3, 2023), https://www.yardimatrix.com/blog/national-student-housing-market-report-september-2023/.
[6] UK Student Accommodation Report,” Cushman & Wakefield (2023), https://www.cushmanwakefield.com/en/united-kingdom/insights/uk-student-accommodation-report.