The student housing sector has undergone significant growth in a relatively short period of time. Previously fragmented and poorly understood, this commercial real estate asset class is now gaining favor with institutional investors due to its strong fundamentals and more professional developments.
According to experts, the influx of institutional capital into the sector can be attributed to factors such as increasing demand for student housing, rising enrollment rates at popular flagship schools, and higher rents driven by desirable locations and amenities offered by institutional projects.
Despite challenges faced by the commercial real estate industry as a whole during COVID-19, student housing has remained resilient. Students have chosen to stay in their off-campus apartments rather than return home during campus shutdowns. This trend has resulted in stable occupancy rates for properties within this sector.
In terms of investment activity, there is still considerable interest from overseas investors looking to deploy capital into this space. However, there is also a gap between buyer expectations based on current market conditions versus seller expectations based on previous valuations before rising interest rates came into play.
While construction starts have slowed down due to increased costs for materials and labor – similar challenges faced by other CRE sectors – demand continues outpacing supply in many markets leading towards higher occupancy rates and rental rate growth potential.
Investors are particularly interested in “Power Five” markets – prestigious state-funded institutions – but emerging Tier 2 markets with growing enrollments are also catching their attention due to potentially higher returns despite perceived risks compared with Tier 1 markets. Despite disruptions caused by cost of capital increases or changes within capital market structures throughout 2023 relative levels were maintained thanks largely because rent growth remains stronger when compared against traditional multifamily assets which helps deals pencil out even after factoring increased debt service costs associated with financing new development opportunities.
