EastAlliance Sector Watch: The State of Student Housing

As you know, our Sector Watch Reports are designed to share our observations about relevant investment news, the state of real estate markets, and the global economy.  Most recently, we shared some insights on what we found in the office sector, especially given our recent investments in that property type (as part of our broader diversification strategy).  However, for this installment, we want to unpack some of the latest observations in the student housing sector, which will continue to play a key role in our investment strategy over the near-term.

While the global pandemic caused deep market uncertainty in 2020, we managed to remain active and found unique opportunities in the student housing sector. Fortunately, we continue to see some interesting activity and deal flow as we enter a slightly more stable 2021/2022 academic calendar. That said, there remain factors that require a more measured approach moving forward.

So, as we continue to identify and assess opportunities in institutional-quality student housing assets in established markets throughout the US, we thought it would be helpful to present some of what we have learned in recent months during our asset visits, conversations with operators, research, and evaluation of potential investment opportunities. This post is not an all-inclusive summary, but we want to share some of the highlights from a handful of articles we found informative (links to each provided below as a courtesy).

01
Renewed International Commitment to the Student Housing Sector

Let’s start with some news on the international front (which as you know is a focus of the EastAlliance platform). While we were fortunate to remain active throughout the pandemic, there was some anecdotal evidence of a cautious slowdown in overseas investment activity. That said, we are seeing encouraging signs that the US student housing market is again gaining interest from the international investor community. According to an article in IPE Real Assets [1] , CapitaLand’s lodging business unit (Ascott) and its hospitality trust (Ascott Residence Trust) announced it will jointly invest into a $109 million student housing project in South Carolina. According to the announcement, the CapitaLand/Ascott venture will contribute 90% of the capital required and partner with a large and experienced US-based developer and contractor. In a sign of confidence in the long-term prospects of this project, the CapitaLand/Ascott entity will acquire the US-based partner’s final 10% upon stabilization of the development. This investment represents CapitaLand’s/Ascott’s second student investment in the US, and noted: “Kevin Goh, CapitaLand’s chief executive officer for lodging and Ascott’s chief executive officer, said: ‘Through our partnership with the leading local student housing developer, Ascott will gain immediate access to prime student accommodation assets in the USA.’”.

02
The Current Status of the Student Sector

No one can ignore or dismiss the impact the pandemic had on academic calendars and the entire sector. The lockdowns and uncertainty strongly influenced the ability for students to make leasing decisions across the US. Within the EastAlliance portfolio of student housing investments, we were able to observe first-hand data on how campus shutdowns affected occupancy, pre-leasing, and overall investment performance. That said, not all markets and regions performed the same. For example, by the spring of 2021, we saw some of our investments boast preleasing above 90%, while others were trailing their 2019 and 2020 norms. But as we learned in recent weeks, preleasing may be lagging in some markets, but operators and analysts believe the summer will show signs of a modest recovery, especially as schools begin to announce their in-person protocols for the upcoming schoolyear. In other words, as the uncertainty as to whether classes will be held in person subsides, student confidence in leasing decisions may increase.

While signs of investor and student confidence increase throughout the year, we also want to share some points about lender confidence (which plays an equally vital role in the market). As pointed out by Multi-Housing News [2] , financing sources are also returning to the student housing sector, but cautiously. Or as the article states, “Since transactions bottomed out in January 2021 following multiple corrections around occupancy, rent rolls, move-ins and rent payments, investors and lenders have been moving forward slowly. School reopenings, combined with property performance and rent collections, offer encouraging signs.”  This informative article goes on to point out several noteworthy points (we highly recommend you read it), including:

  • According to a CBRE student housing financing specialist, the student housing capital markets are seeing an increase in liquidity, for both existing product and construction financing.
  • While lenders return, they are more cautious and requiring higher debt service coverage, which is not surprising to EastAlliance since lockdowns can lead to fluctuations in cash flows.
  • Rent growth remains positive at 1.3 percent but steadily declined during the pandemic. Preleasing for fall 2021 was at 37 percent as of January, a 4 percent year-over-year decrease, according to Yardi Matrix data. (As stated earlier, we are seeing somewhat similar statistics within our investment portfolio, with some outperforming the broader market – preleasing rates in our student housing positions range from 100% to 31%.)
  • According to a student housing specialist based in Texas, “Overall, there’s been a flight to quality among lenders to big Power 5 state-supported schools as investors target on-campus assets and those within a one-mile radius. With the scarcity of deals in 2020 balanced by the number of buyers, prices for Class A student housing properties rose and cap rates declined for the seventh-consecutive year.”
  • It appears cap rates are still in the 5.00% to 5.75% range, with leverage maxing out at 65%, which is line with what EastAlliance has been seeing in the US student housing market.
  • While the firm Walker & Dunlop expects a 30% year-over-year decline in deliveries of new product, the Southeast will account for approximately 38% of beds on track for delivery in 2021, with the Southwest following with the next largest share at 16%.
  • As agencies re-enter the market, sources for construction financing will likely continue to be local and regional banks. And while the typical student housing lenders are returning to the market, new entrants like debt funds and mortgage REITS are emerging as financing alternatives.

03
Student Housing Remains Steady Relative to Other Property Types

In another set of articles we gathered as research, it appears there is data suggesting student housing remains one of the more resilient property sectors, even during a pandemic. As an article in Commercial Observer notes [3] , the disruption in student housing did not necessarily translate to the massive downturn some predicted. Yet, there is no denying the pandemic did have an impact on the sector in 2020/21. As noted in the article, “Post-secondary enrollment dropped 2.5 percent annually in fall 2020, nearly twice the rate of enrollment decline in fall 2019, according to analytics firm Yardi Matrix, which tracks the off-campus student housing markets around 200 major schools. At a 3.6 percent annual decrease, undergraduate enrollment drove much of this drop.  Freshman enrollment dwindled a record 13.1 percent. At the same time, though, COVID also renewed a demand for more spacious, off-campus digs.  Most on-campus housing crams two or more students into a unit. The demand for more socially distanced setups, with doors to close between beds, drove construction starts.” 

Of course, the slight drop in enrollment (including from international students) last year is not the only data point to consider. The accelerated emergence of online/hybrid learning will also play a role in residential demand moving forward, but as noted above, we believe demand for space will remain steady for more private, modern, and socially distanced off-campus options over the near-term. While rents may be a bit flat (or face downward pressure) as schools emerge from lockdowns this upcoming academic year, we suspect rate growth will trend moderately upward over the long-term.

GlobeSt [4]  also references Yardi Matrix in a recent article.  It also notes the industry-wide decline in pre-leasing caused by the pandemic, but points to signs of a slight recovery over the summer months. According to research conducted by Yardi Matrix, preleasing for surveyed schools was 58.6% in April, which was below the figures reported for the same periods in 2020 and 2019. This is consistent with EastAlliance’s observations, although as stated previously, the range of preleasing does vary widely by market and institution. One of the most interesting excerpts from this article confirms the importance of understanding the local market: “In general, universities in Eastern states have had better preleasing and rent growth, while universities in Western states have struggled a bit more. There is also a noticeable trend in campus settings, as college towns have generally performed betterThese universities face less competition from conventional multifamily properties in the shadow market.”

Another interesting observation was that while some report overall university enrollments down 2.5% last academic year, enrollments at four-year public universities remained relatively flat. Also, we cannot overstate what the pandemic did to international enrollment, which represents a meaningful proportion of the student body at many US universities – so until the world tackles the pandemic and achieves substantial vaccination numbers, the flow of international students into the US may need some time to recover to pre-pandemic levels.

04
Impact on EastAlliance Student Housing Investment Strategy

In short, our commitment to high-quality, well-positioned student housing assets remains strong and our approach remains unchanged.  Even as travel restrictions and uncertainty limited international investments in student housing last year, we were able to maintain a steady (and growing) pipeline of opportunities for our investors and partners.  As we assess all the opportunities we come across each month, we find that our focus on sponsor experience, university size, asset quality, asset location, and flexible capital structures has worked well.  However, given what we have learned from our recent travels and research, we think a sound strategy will require a slight shift on emphasis. For example, as pointed out earlier, the pandemic may be driving demand for more “personal space” by students, so assets with bathroom/bedroom parity and a substantial share of studio and 1-bedroom suites may earn extra attention. Furthermore, if enrollments (and absorption) remain flat in this “post-pandemic” period, proximity to campus (and retail amenities) and access to transportation should be examined relative to any competitive set. Of course, understanding a university’s in-person and vaccination policies will now play an additional role in assessing projects entering the 2021/22 academic year.   While we are still in the midst of navigating the pandemic’s impact on the market, we remain confident that investments that meet our screening criteria should perform in line with the broader market but may require some extra scrutiny and additional patience (including longer holding periods) in this upcoming period of recovery. 

05
Summary

As we continue to invest alongside our experienced operators and expand our investment allocation in the student housing sector, we continue to learn about preferences, challenges, and opportunities from all stakeholders, and use these valuable data points to forge ahead.

As we shape our fund strategies and look to expand into the NNN, multi-family, office, and retail sectors soon, we fully anticipate a continued commitment to the student housing asset class. While the past year presented some challenges in student housing, we were fortunate to invest alongside experienced operating partners and developers who worked through the disruption with the highest level of professionalism and transparency. As we enter a new schoolyear, we are eager to expand on these valued partnerships, and introduce new opportunities to our investors.

As always, thank you for your time and we hope this post finds you and your loved ones happy and well.   If you are interested in staying connected, getting more posts like these, or learning about our platform, please be sure to follow us on social media (WeChat) or visit our website at eastalliance.us

The EastAlliance Family 

ref:
[1] https://realassets.ipe.com/news/ascott-ascott-residence-to-develop-110m-us-student-housing-asset/10053460.article
[2] https://www.multihousingnews.com/post/capitals-flight-to-quality-in-student-housing/
[3] https://commercialobserver.com/2021/06/student-housing-rents-construction-data-covid/
[4] https://www.globest.com/2021/06/11/student-housing-anticipates-stronger-school-year/?slreturn=20210516121848