The Rise and Resilience of Student Housing: A Lucrative Investment Opportunity
By Celine Winter, Director of Business Development at W5 Group.
In recent years, colleges and universities have experienced a surge in enrollment despite the challenges posed by the pandemic. However, this growth has been met with limited new supply of rental units. Despite this hurdle, student housing remains a compelling investment opportunity due to its resilience during economic downturns. As such, it is crucial for investors to understand the unique trends and landscape surrounding this real estate sector.
The Current State of Student Housing
With over 22 million university students in the U.S., there is a significant demand for rental housing catering to this demographic. Yet only 22% of undergraduates are accommodated by the country’s largest 175 universities, leaving room for private sector involvement in providing additional housing options. Typically rented on a per-bed basis with minimum lease terms lasting twelve months or more, these properties also benefit from parental guarantees which ensure consistent income streams for owners.
Key Trends Shaping Today’s Student Housing Market
To attract potential renters among college students who prioritize convenience and innovation while being environmentally conscious; location proximity plays an essential role as shorter commutes are preferred over longer ones when choosing off-campus accommodations near desirable areas within campus vicinity.
Moreover,
property owners must incorporate state-of-the-art shared amenities along with smart building solutions that cater to co-living spaces – all while demonstrating environmental sensitivity through ESG initiatives that contribute towards creating healthy communities within each property.
Investing Strategically In The Sector
As with any investment class comes both rewards and risks associated; however student housing offers above-average returns coupled with steady cash flow opportunities.
This can be attributed partly due to high occupancy rates averaging at around 95%, driven by an evident mismatch between supply & demand dynamics favoring purpose-built rentals.
Furthermore,
the average rent prices across top-200 US Universities have witnessed year-over-year growth of approximately 7% through Q1 2023. While student housing rents tend to follow multi-family trends, the historical cap rate spread of 25-50 basis points has provided investors with an advantage in terms of better entry prices and higher cash yields.
However, investing in student housing does not come without risks. Higher interest rates or a severe recession could potentially impact property values negatively.
Additionally,
a slowdown in enrollment growth or increased competition from other investors entering this market segment may also pose challenges for rental demand and supply dynamics.
While no one can predict the future accurately, it is essential for investors to be aware of these potential pitfalls.
What Investors Need To Know
Individuals and institutions considering an allocation towards student housing must align their short & long-term goals accordingly. From a conservative standpoint; capital appreciation should be expected over longer periods while positive cash flow generation can occur sooner than later.
Investors have two options when it comes to managing their investment properties – they may choose to do so independently or seek out experienced partners who are well-versed with this sector’s nuances.
At W5 Group,
our extensive network coupled with our research-driven approach provides us with a strategic edge when identifying attractive opportunities within the student housing space. We conduct thorough due diligence before making any offers on properties ensuring that our investments are sound and secure.
The Road Ahead
Once considered as niche real estate assets; Student Housing Investments have now entered mainstream markets attracting significant capital inflows according to JLL’s early reports from 2023 which stated “The fundamentals driving demand for Student Housing remain strong – leading more institutional players into this asset class.”
Transaction activities within this sector have witnessed exponential growth during recent cycles highlighted by Blackstone’s $13-billion acquisition deal involving American Campus Communities back in April’22
With greater institutional interest comes improved liquidity providing even more benefits for investors looking at diversifying their portfolios through exposure towards Student Housing Assets across the country.
Looking ahead, we believe that student housing investments in Sunbelt markets; particularly those located near Power-5 schools (top five football conferences in the U.S) are poised for significant growth. These schools have witnessed a disproportionate surge in enrollment post-pandemic due to factors such as better weather, improved lifestyle options, migration trends and stronger brand recognition.
At W5 Group,
we foresee a bright future for student housing investments within these markets and encourage investors to capitalize on this lucrative opportunity.
