Mark Podgainy: A Look at the Current Student Housing Market

by Katie Sloan

Student housing market volatility stabilized somewhat in 2022, as more students returned to campuses for in-person classes and pre-leasing rates for the school year exceeded 96 percent across the top 200 academic institutions in the country, according to data from Yardi.

The U.S. higher education market, however, is experiencing declining enrollment overall. This has been a consistent long-term trend and is likely to accelerate in part due to what has been described as the “enrollment cliff.” This dramatic drop in the college-age population is expected to begin in 2025 and is predicated on the exceptionally low birthrates that occurred between the years 2008 and 2011, a period of economic stress and uncertainty driven by the Great Recession. 

There has also been a so-called “flight to quality” taking place in higher education for several years. Flagship state and private institutions have experienced an increase in demand from prospective students, while smaller and less prestigious schools have seen declining demand and enrollment. More students and larger class sizes are straining existing infrastructure and resulting in a shortage of student housing in high demand locations. Additionally, since the start of the COVID-19 pandemic, many families have been relocating from Northeastern and Midwestern states to the South, Southwest and West, and schools in those locations are experiencing sizable growth and a need for expanded student housing options. 

Although a challenging economic environment took a toll on the broader housing market last year, student housing sustained more robust transaction activity, with the pipeline for new student housing developments continuing to flourish. As of last October, more than 31,000 bedrooms were under construction at the ten largest U.S. universities. The University of Texas at Austin led with 4,726 units in development.

During 2022, 70 properties were sold with an aggregate sales volume of $22.8 billion at an average cap rate of 4.87 percent. The largest transaction was the sale of University Village in Tuscaloosa, Alabama, with 455 units and 1,164 beds. The University of Texas at Austin, the University of Wisconsin-Madison and University of Maryland were the most active in terms of the number of beds under construction in 2022, with 5,522, 2,814 and 2,648 in the works, respectively, according to Berkadia’s 2023 Student Housing Report.

The five most active student housing developers are Landmark Properties, Core Spaces, Peninsula Investments, Harrison Street and Subtext, with a combined total of 113,118 beds planned through 2026, and the top 25 developers having a total of 251,921 beds planned over the same time frame, according to data from Student Housing Business. Also worth noting, the top 25 student housing owners own a total of 659,208 beds in 1,142 properties.

Larger financing transactions have become more challenging in the current economic environment, but there have been exceptions, and at the midpoint of the fall semester 2023, the overall outlook for student housing remains positive. This is driven by enrollment growth, evolving student preferences and the aging existing inventory. Recent notable projects announced or breaking ground include a 2,000 bed project at the University of Tennessee, a 1,200 bed project at William & Mary, and an 859 unit project at FSU-Tallahassee.

Continued growth of the middle class worldwide, which has historically invested more of their overall income on education, is expected to fuel the continued expansion of higher education facilities across the U.S., including a growing need for undergraduate and graduate student housing and faculty accommodations. Additionally, the Organization for Economic Co-operation and Development (OECD) forecasts that there will be nearly 8 million internationally mobile students by 2025 — up from 5 million in 2019 — and many of these are expected to matriculate to U.S. schools.

Student housing is now among the most in-demand commercial real estate asset classes, and as demand has continued to outstrip supply, student housing has become more and more expensive. With an estimated 20.5 million enrollments by 2027, and the top 175 American universities only able to house 21.5 percent of their undergraduates in on-campus housing, according to CBRE Research published just prior to the start of the pandemic, significant opportunities remain for investors in student housing.

Amenity-rich offerings with trendy community spaces, wellness facilities, a range of study space options, coffee and juice bars and state-of-the-art technology remain in high demand. We are seeing architects and designers focusing on these and other features as they create spaces designed around sustainability, community experiences and merging interior and exterior environments. 

As with many categories of commercial real estate, disparities in student housing demand exist based on location and demographics. Although many schools around the country are continuing to grow, some are facing declining enrollment and while industry data suggests a fall 2023 increase in new deliveries, levels still remain well below those experienced in the years leading up to the pandemic.

Three universities (Ohio University, the University of Southern Mississippi and the University of Mississippi) each achieved greater than 20 percent growth in pre-leasing in 2023 as compared with same period performance in the previous year, yet rent growth at two of those schools (Ohio University and the University of Southern Mississippi) declined during that same period. Understanding performance nuances such as these is of critical importance to investors and lenders who are actively engaged in the space. 

For lenders, staying close to borrowers and understanding the drivers of financial performance trends is essential to being able to take timely action to both capitalize on upside market opportunities or intervene during periods of concern to best minimize downside risk. Ultimately, to be successful investing or lending in student housing participants need to understand both the traditional drivers in each local market (e.g., supply, rents, pre-leasing rates, etc.) as well as the short and long-term operating trends of the local schools (applications, selectivity, enrollment, financial performance, etc.).  This has become all the more important given the flight to quality, declining enrollment, and migration trends that have, and will continue, to impact higher education institutions over the next decade.

—Mark Podgainy is managing director, education practice leader and real estate and hospitality practice leader with Getzler Henrich & Associates LLC, a middle-market corporate restructuring and operations improvement firms. Podgainy has successfully worked with numerous companies to achieve growth and profitability. He can be reached directly at: [email protected]

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