Lessons for the Future
Student housing faced a difficult start to the 2020-2021 academic year, but the sector has proven resilient as COVID-19 continues to sow uncertainty.
When the COVID-19 pandemic hit last March, colleges and universities across the U.S. switched to online learning and sent students home. In the following months, schools mapped out the 2020-21 academic year, with an emphasis on virtual learning as well as stringent safety measures to keep students socially distant. All of which would affect the demand, the value, and even the design of student housing.
“Overall, the market has held up resoundingly well,” says Jaclyn Fitts, executive vice president for the national student housing team at CBRE. This fall, the company polled operators representing some 600,000 beds, a significant portion of the operators in the sector, says Fitts. “We looked at October 2019 versus October 2020, and overall, the sector is only about 3.5 percent behind in occupancy, year-over-year.”
The new watchword for campus housing has become “de-densification.” Schools eased on-campus residency requirements, and many left dorms empty to use as quarantine space if needed.
Research from Newmark shows similar trends. “Occupancies are within 250 to 300 basis points from where we were last year, which is pretty remarkable,” says Ryan Lang, vice chairman, multifamily capital markets, at Newmark. “From a collections standpoint, we're right on top of where we were last year as well. If you look at it by and large, the student housing industry as a whole has held up significantly better than virtually every other asset class, with occupancy averaging about 95 percent at most Tier 1 universities and collections averaging north of 97 percent across the board.”
There were areas where occupancy rates didn't do as well. Lang and Fitts both cite the University of California and California State University systems making early announcements that classes would be completely virtual. Statistics from RealPage Inc. show that at least four schools in those systems were below 80 percent leased at the start of the school year. But schools in the Southeast and Midwest were among the first to open on-campus learning, and many boasted leasing rates above 95 percent.
A few factors contributed to the continued high demand. The new watchword for campus housing has become “de-densification.” Dorm rooms intended for two or three students became singles. Schools eased on-campus residency requirements, and many left dorms empty to use as quarantine space if needed. And “in locations where schools opened in-person learning and then later closed the campus or emptied on-campus residence halls, we experienced higher demand for off-campus housing,” says Jay Pearlman, senior vice president for the Chicago-based Scion Group — Advisory Service, which has 87 student communities in 57 markets around the country.
“On top of that,” Fitts points out, “students had been living with their parents from March through August and really wanted to get back to their friends, their norm.”
Lang points to several areas where overall enrollments did dip — thanks partially to freshmen who opted to take a gap year and international students, also primarily freshman, who stayed in their own countries. That was offset, he says, by U.S. students who might normally have studied abroad and stayed home this year. There are usually 250,000 to 300,000 U.S. students who go abroad, and around 250,000 international students who come for the first time, “so we saw kind of a net wash,” he says. And of international students who were already studying in the U.S., some 90 percent of them chose to stay and went back to school, he adds.
Both Fitts and Lang note that markets where demand is strongest tend to be Tier 1 schools. “A majority of Tier 1 flagship public universities — and even Tier 1 private schools like the Ivy Leagues — did very well from both occupancy and collections,” says Lang.
Running the Numbers
Fitts observes that transactions in the sector slowed at the start of COVID. “The agencies — our primary lenders — pulled back and said, 'We don't really want to provide any loans for student housing until we know if there are heads on beds in August or September.' So, we saw a temporary stop in lending. Investors wanted the same thing — they wanted to understand what the occupancies were going to look like. Were people showing up for school? Were universities going virtual? There was just a lot of uncertainly, so not a lot of transactions occurred at all between March and August.
“Since then, the agencies are now lending again. We see strong fundamentals. Collections are above standard multifamily properties, so investors are starting to gain interest in the space and get more and more interested.”
Lang says that Newmark stayed busy. “We've closed 16 deals through COVID,” he says. “We have 19 under contract right now [as of November], and another 15 or so that are on the market. We've found that new construction product that has stabilized is seeing heightened investor interest and is still pushing through on record prices per unit and per bed.”
Newmark's 2020 student housing midyear market overview found that the average price per unit in the first half of 2020 was a record $235,429, compared to $230,081 for the first half of 2019. Price per bed rose 4.9 percent to $96,295 from 1H2019 to 1H2020. At the same time, Lang adds, construction prices have held steady, and he hasn't seen supply chain issues affecting construction.
He's also seen healthy interest from international investors. Newmark's midyear report said that 37 percent of buyers were international investors, spending $589.9 million. By November, Lang estimated that about half of the company's deals under contract were with groups based overseas, and he predicted that, by year's end, 2020 transactions could set a market share record for foreign capital investments in student housing.
Cap rates for student housing, says Lang, “have been one of the more interesting things to watch. Where you have best-in-class products, stabilized assets, properties that are pedestrian to campus at a Tier 1 university — we've seen cap rates compress by 25 to 50 basis points from pre-COVID levels.”
The pandemic has had a considerable effect on housing properties themselves. “There had already been this drive in student housing for bed/bath parity,” says Fitts. “When you have your own bedroom and bathroom, you really have the ability to socially isolate from your roommates. That had been a trend in the industry for quite a few years already, and that trend has definitely helped now.”
“One of the biggest shifts in design is a response to the obvious: How willing will students be to live in close quarters — as in typical residence hall arrangements — going forward?” says Scion's Pearlman. “Higher education has spent decades designing communal facilities to encourage students to come out of their rooms and into shared community spaces. Now, with the social-distancing effect, on-campus systems are reducing density, and off-campus providers have experienced decreased demand for double-occupancy apartments.”
That could reverse itself post-pandemic, he adds, “but we believe a cultural shift has occurred, calling the balance of private and communal space into question. We believe that demand will trend [toward] modern off-campus student housing configurations [such as a] full apartment with a kitchen and living room, private bedroom, and near 1:1 bathroom ratios.” Concepts like microunits may also become popular, particularly from a cost standpoint.
Another popular discussion point in the sector over the last few years has been the “amenities war,” with extras like pools, deluxe gym areas, coffee bars, and even climbing walls included on properties. COVID has rendered some of these extras difficult to use. Indeed, Pearlman says that operators had to suspend some, such as shuttle buses and open food and coffee stations. While this saved operators some money, the savings were offset by increases in enhanced cleaning, personal protective equipment, and other operational changes.
Many amenities associated with student housing have closed during the pandemic, though climbing walls allow for proper social distancing.
Instead, says Fitts, the No. 1 amenity that students now look for is high-speed internet. “That amenity is even more important when you have residents sitting in their units doing virtual learning,” she says. “Investors will need to continue to spend on that infrastructure to make sure that they've got fast enough connections.”
Could COVID impact oversupply in the long run? “We haven't seen that as it relates to COVID in particular,” says Fitts. “We definitely have seen it as it relates to markets that might have already been in a supply-demand imbalance. There have been markets, where pre-COVID enrollment was starting to decline because it was a Tier 2 or 3 university, and we've seen enrollment be a lot stronger at Tier 1 universities. We have seen multifamily investors say that purpose-built student housing is actually prime for a conversion to conventional multifamily. You can take the four bedrooms and make them into two, but that's not COVID-driven. I think that anything that's COVID-driven, people think we will revert back to the norm for the most part.”
Spring and Beyond
Both Fitts and Lang are optimistic about the next six months in the sector, both from demand and investor standpoints. “Spring semester could be interesting as we get further along,” says Lang. “For students who took a wait-and-see approach to going back, we think there will be a substantial number who will jump back in and go to school or at least go back to the college town. We're expecting there will be an uptick across the country in the spring semester and into the summer. If occupancies and collections continue to remain at elevated levels, that certainly will help the investment community in general.”
We believe that demand will trend [toward] modern off-campus student housing configurations [such as a] full apartment with a kitchen and living room, private bedroom, and near 1:1 bathroom ratios.
—Jay Pearlman, Scion Group
“A lot of investors sat on the sidelines since March, and I think we're really fortunate that our enrollments for this academic year are set,” says Fitts. “We know what the revenue is going to be for the remainder of the '20-'21 academic year, and it's positive. It's a good story for investors who are looking to get money out the door; they might have previously bought retail, hotel, or even office. We're a good alternative asset class. We still have cash flow and the certainty of cash flow through the next academic year, which I think is something that can't be understated.”
Lang points out that in some instances, new construction will slow simply because the approval process has slowed down in many areas because of the pandemic. But in terms of overall transaction volume, “It seems likely that we're going to see a pretty substantial amount of product hit the market in early 2021,” particularly if a COVID vaccine picks up traction and volatility over U.S. elections wanes. “There will be more certainty for prospective investors as well as for those who were thinking of selling,” he says. “We are expecting things to pick up; they've already picked up dramatically over the last few months. We think next year will be very, very busy. The industry has been pandemic-resilient."