While investors continue to be eager to buy student housing properties, good deals are hard to find. “There haven’t been those massive portfolios that we saw in prior years,” says William Vonderfecht, co-leader of the student housing team for real estate services firm CBRE.
Few student housing portfolios are available for investors to buy right now. Stabilized properties within walking distance of campus are also few and far between. However, potential buyers have also become more picky. They are offering less money to buy properties in places with a lot of competition from new construction. That has pushed the average cap rate for student housing higher, despite steady demand, according to Dorothy Jackman, executive managing director of the national student housing group based in the Tampa, Fla. office of real estate services firm Colliers International.
Lots of demand, but market dynamics are changing
Demand for student housing properties is still high, but fewer sellers are bringing properties to market. That is because if they sold their student housing assets, these investors might struggle to find a higher-yielding alternative to invest their capital in.
“Owners with core pedestrian assets are holding onto them,” says Vonderfecht. “People are not willing to trade because these deals are so hard to duplicate.”
As a result, cap rates on student housing properties went up in the first half of 2019. Cap rates in the sector inched up to an average of 5.8 percent in the first three quarters of 2019. That’s up very slightly from 5.7 percent in 2017, according to data from research firm CoStar.
In addition, as buyers worry more about potential overbuilding, they are including these worries in the prices they are willing to pay for student housing. “The spreads are widening in Tier Two and Tier Three markets between the expectations of sellers and the risk profiles of buyers,” says Jackman.
In some case, potential buyers are also including the skepticism of their lenders in their low bids. “Lenders are getting more conservative in underwriting student housing loans,” Jackman notes.
Fewer giant portfolios sold
So far, fewer portfolios of student housing properties have come up for sale this year. By contrast, in 2018, the market saw Greystar’s $4.6 billion purchase of the real estate investment trust EdR from its shareholders. “We haven’t seen that large splash of big transactions,” says Vonderfecht.
As a result, the total investment sales volume in the sector has dropped as well in 2019. “Transaction velocity is likely to be down for third and fourth quarters of 2019 compared to past several years,” says Jackman. “Sales volume is trending more in line with earlier years, which did not include large portfolio transactions.”
Investors spent just $3.2 billion on student housing properties in the first three quarters of 2019, according to CoStar. “It looks to be another year of decreasing trades,” says Alexander Levy, a consultant with CoStar Portfolio Strategy. At this rates, investors are unlikely to match the $6.7 billion they spent on student housing properties in 2018.
Foreign investors bid for properties
Private investors, including smaller companies and high-net worth individuals, are still the most important buyers of student housing properties, but other kinds of investors are taking a larger share of the market.
“Since 2010, institutional investors have grown to match the share of investment activity seen by private investors,” says Levy. “Since 2016, private equity investors have also become more active.”
Institutional investors, including private equity funds, spent $1 billion on student housing properties from the start of 2019 through the beginning of October, according to Real Capital Analytics (RCA), a New York City-based research firm.
Cross-border investors are also becoming more active in the sector, even though the large, portfolio transactions they favored a few years ago are more difficult to find. “International buyers are starting to buy one-off transactions,” notes Vonderfecht.