Student Housing Boasts Favorable Fundamentals, but Credit Crunch Slows Deal Flow

Occupancy rates for student housing properties have remained strong, but the credit crunch has stemmed the tide of deals.Cap rates on student housing properties have risen from 50 to 100 basis points recently, according to Patton Jones, managing director of the national student housing group for Apartment Realty Advisors. Where cap rates were typically in the 6 percent range, they are now approximately 6.5 percent for top-tier, well-located properties, and in the 7 percent range for an average property at a smaller school.While potential buyers are able to obtain debt by way of Fannie Mae and Freddie Mac financing, many have not been able to contribute enough equity to close deals, Jones said. Private, regionally focused buyers account for about 90 percent of the investment pool for student housing, while two publicly traded REITs, American Campus Communities and Education Realty Trust, are also active in the sector.But while the credit crunch has hampered transaction flow, student housing does have a mostly positive story to tell, Jones contends. Buyers can enjoy greater yields, as these properties trade about 100 basis points higher than straight apartment buildings, due to their 100 percent tenant turnover every year. And enrollment at colleges across the country is at high levels–and due to the large number of “echo boomers,” likely to increase further. Jones also points out that universities, many of which are on tight budgets, actively encourage off-campus student housing development. He notes that the University of Texas has worked with the city of Austin to change zoning laws near the university so that off-campus housing could be built. And occupancy at existing properties has been strengthened by the credit crunch, as stricter lending requirements have meant that student housing development has been slowed, thus strengthening occupancy at existing properties.