Student housing is capturing the attention of developers, investors and institutional lenders as university enrollment and record rent gains position the sector to outperform other property types.
That’s one of the dominant themes evident in Walker & Dunlop’s recently released 2024 Student Housing Outlook. Although transaction volume declined to $5.7 billion in 2023 from the previous year’s all-time high of $24 billion, strong operating fundamentals are attracting new entrants to the sector, including institutional investors and lenders.
“Student housing is entering a resurgence where we predict continued outperformance relative to other asset classes, thanks to a fundamentals base that has arguably never been stronger,” says Chris Epp, managing director of property sales at Walker & Dunlop.
“We were seeing 8 percent to 12 percent rent growth last fall for the 2023-24 school year, which I believe is the best year in the sector’s history,” Epp says. “Rent growth will be very strong this fall and for the next couple of years, too, because supply is becoming more constrained due to the scarcity of construction financing and the high costs of land and labor.”
Long-Term Financing Flows
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As with nearly all property types today, obtaining construction financing has become a challenge, says Will Baker, a senior managing director and loan originator at Walker & Dunlop. This reality means there are fewer student housing projects breaking ground to serve growing demand in major markets. For acquisitions and projects nearing completion, however, borrowers are often surprised to discover they have a variety of financing options available.
“There’s a misconception that the spigot of financing has been turned off, but that is certainly not the case,” Baker says. “There is a myriad of providers who understand and want to finance projects in the student housing space, and we compete aggressively to win that financing for our clients.”
From sovereign wealth funds to major Wall Street investment groups, institutional lenders have flocked to student housing since the COVID-19 pandemic. In the face of a general lending pull-back by conventional banks, these providers have become a vital resource for student housing developers and investors. Institutional interest is almost exclusively focused on major markets dominated by powerful, state-supported colleges and universities with soaring enrollment, Epp adds.
Many smaller campuses and private institutions suffered or even closed during the pandemic, Epp says, while students poured into large universities where they could continue to live away from their parents and pursue their studies. He attributes the greater success of large academic institutions primarily to their ability to maintain enrollment during lockdowns by using remote learning technologies, which many smaller schools were unable to deploy as effectively.
At a time when other real estate asset types were suffering from vacancy and the threat of widespread defaults on both leases and debt, student housing boasted stability and profitable operations. That’s when institutional capital began entering the sector in search of better returns.
Cautions and Encouragement
Most of the new student housing supply began development during the pandemic and became bogged down under the weight of rising costs, interest rate hikes and a pullback from traditional lenders before the project even started. However, Walker & Dunlop’s project tracking suggests new supply deliveries will taper next year and in 2026. While the development pipeline lags, operating fundamentals will continue to drive high occupancy, rent growth and rising asset values in the major markets, Epp says.
Developers should avoid launching projects in markets that lack barriers to entry by competing builders, Epp explains. Today’s risk-averse institutional investors favor large projects at major, state-supported schools, and small-scale projects are unlikely to meet their minimum thresholds.
He also cautions clients against developing student housing at private colleges or universities that are more likely to seek maximum returns on every aspect of a project. State-supported schools, by contrast, are more likely to contribute free or discounted building sites and other incentives that increase a developer’s ability to secure financing and a positive cash flow.
There is a tremendous amount of dry capital that has been sitting on the sidelines in this sector, and the capital providers are very eager to put it to work. Baker has already started to see an uptick in acquisition opportunities coming out of the InterFace Conference in Austin and fully expects that trend to continue throughout the year.
“Those deals have already started coming to the market and are trading because the sellers are motivated to work with buyers,” Baker says. “Buyers can make acquisitions pencil out with positive leverage at current interest rates and cap rates. They don’t necessarily need interest rates to drop, but they do need enough interest rate stability and consistency for terms to remain valid from a purchase negotiation through closing.”
Baker applauds the student housing sector’s recovery since the pandemic and looks forward to accelerating activity.
“We’ve had record-level rent increases for two years in a row, and I have a feeling it’s still going to be pretty strong this next year, given that we will see supply moderate even more,” Baker says. “If we can just get a little help from the capital markets in terms of stability, we could see a really significant increase in activity across the board in 2025.”
— By Matt Hudgins. This article was written in conjunction with Walker & Dunlop, a content partner of Student Housing Business.
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