Despite increased interest rates, well-located student housing continues to be viewed favorably as a resilient property sector, registering record highs in 2022. According to data provided by Yardi, the 2022 academic year began with record leasing rates (96.6%) within its Yardi 200. Perhaps equally encouraging is that as of December 2022, the Yardi 200 boasted a preleasing rate of 48% for the 2023 academic year, which represents a new record high.
Investor demand remained strong in 2022. Through the end of December, Yardi 200 university properties recorded sales of approximately $4.9 billion ($2.8 billion for the same period in 2021) and an average per bed price of $76,800, which marks a 10.8% increase from mid-2022 and well above the year-end 2021 figure of $67,300. JLL reported encouraging volume figures as well. It reported aggressive growth in sales volume in 2022 over 2021, with an annualized total of roughly $18.9 billion (compared to $11 billion in 2018).
Sales volume and average pricing is not the only data point seemingly unencumbered by rising interest rates in 2022. Within the same Yardi 200 subset, there were 31,000 beds under construction at the 10 universities with the largest development pipelines. The data on rental rate growth varies (but positive) with reported annual growth rates ranging from 4.7% to 8.8% year over year (average net rent was reported to be $847/bed in October 2022 vs $779/bed in November 2021).
Institutional interest in the sector remains strong as evidenced by the $3 billion partnership formed between Abu Dhabi Investment Authority and Landmark Properties or Blackstone’s $12.8 billion acquisition of American Campus Communities, which involved 166 properties across 71 US markets. According to JLL, cross-border investment continues to trend upward over the long term. They report that from 2012 to 2016, cross-border capital held 6.7% of the market yet from 2017 to 2021, it increased to 20% by investing nearly $10 billion in the sector.
We anticipate demand for student housing near larger institutions to remain strong (but some weakness in schools with less national recognition) and adequate supply to be lagging slightly. As a result of this continued supply/demand inefficiency, rental rates will remain strong in the near-term/current academic year. We suspect that if development volume slows down as a direct result of higher borrowing costs, the supply shortfall may support the sector’s rental rates in the short term. That said, we are seeing an uptick in cap rates, which is not a surprise as the market continues to absorb higher interest rates and lower debt proceeds.
Our watchlist for the sector remains unchanged from the previous quarter. While supply/demand dynamics appear to be strong in the short-term in larger markets, some submarkets linked to smaller universities continue to fight an uphill battle. Yet, in general, undersupplied markets will experience continued rental rate growth (at more moderate levels). We continue to believe universities will be forced to address housing shortages in underdeveloped submarkets by investing in more on-campus housing, which will impact competitive off-campus supply, eventually. We are already seeing this play out in certain markets.
Well-positioned assets that provide competitive amenities and are tied to well-known universities will continue their positive performance and stable cash flows. We anticipate a slower transactional flow as interest rates will slow buyer activity. We also expect that tighter underwriting assumptions from bother buyers and lenders may be reflected in an uptick in cap rates for the first half of 2023.
Our snapshot view of the sector in early 2023 leaves us with the following few themes, currently:
- Rent growth will remain positive, but not at the historically high levels of previous quarters.
- The sector will see tightened underwriting standards both on the lending and acquisition side.
- Affordability will continue to be an issue that must be addressed. Whether by an increase in investment in on-campus housing or by the need for the market to supply more beds that are not focused on the luxury end of the spectrum.
- Higher borrowing costs (and tightened lending standards) will slow the previous development spikes in some regions, especially in the non-Power 5 markets.
- Investor demand for student housing assets will remain strong, especially in growth regions. Smaller market universities will require a more careful eye on enrollment figures and on-campus housing requirements.
- Moving forward, there may be interesting opportunities in value-add or more affordable student housing projects.