Market for Student Housing Could be Softening

Student housing may be one of the most reliable investment options in real estate, thanks to a largely recession-proof tenant population and increasing student populations on most college campuses. However, in 2017, many analysts said that the market might have become oversaturated thanks to an enthusiastic 2016, wherein investors spent 21 percent more in the sector than they did the following year. However, this was due, in large part, to a $1.9 million purchase in 2016. In 2017, investors still spent $7.7 billion on student housing properties, the second-highest amount ever.

Although student housing is still attractive, average Cap rates have been falling since their peak in 2011 of seven percent. Fred Pierce, president of Pierce Education Properties and a longtime investor in, developer, and manager of student housing properties, observed that prior to the boom in student housing, “Cap rates were largely in the 6’s.” Now, however, he said they are “regularly in the 5’s.” Cap rates tend to be lowest in student housing properties within about half a mile of the college campus, although some investors are forcing higher rates by buying older properties and upgrading them.

Jaclyn Fitts, CBRE’s director of national student housing services, cited “stable revenue performance throughout the last recession and through this expansion cycle” as a primary driver for continued and growing investor interest in student housing. “For 2018, we continue to see equity flooding into the space,” she added. Fitts also noted, “There is a demand for [older student housing properties] too. There are students who can not afford to live at new, pedestrian properties. They seek affordability.”

Investor Insight: Student housing is one of the most popular sectors in real estate thanks to steady demand, solid tenants (thanks to co-signing parents and student loans), and a growing student population. After a relative slow-down in activity in 2017, 2018 shows indications of a rebound.

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