Student Housing: More Than Just a Defensive Play

By Kevin R. Larimer, Managing Director Student Housing, Berkadia: Is "defensive" truly an appropriate classification for student housing investments?

Kevin LarimerStudent housing has long had the well-earned reputation as a recession-resistant product, and as such, is widely regarded as a wise hedge against an economic downturn. The sector’s performance during the Great Recession was more than just resilient; it was outright strong. Now, eight years later, investor interest in student housing is at an all-time high. In 2015, student housing transaction volume set a record $5 billion in sales, and with sale volume having already reached $4.9 billion by the end of second-quarter 2016, this year is on pace to shatter previous figures.

Many attribute this interest to investors looking at defensive assets since, historically, the U.S. economy cycles into a recession every seven to 10 years. But if your view of student housing is only as a defensive play, then you are missing the true value and beauty of the sector.

In the Eye of the Beholder

The beauty of student housing is that it offers the best risk-adjusted return in U.S. real estate–and arguably, across the world. In an environment where one-third of the globe’s developed nations’ sovereign debt is at negative yields, capital from around the world is flowing into the U.S. multifamily market in search of yield and security. A portion of those allocating this capital has realized student housing assets can be acquired at better yields than its conventional multifamily counterparts, and when analyzing the fundamentals of the industry, the risk profile is often times lower than in many multifamily markets.

Moreover, student housing’s operating fundamentals have never been stronger. With bed deliveries reaching a peak of 65,000 beds delivered for the start of the 2015-2016 academic year (AY), those numbers are starting to steadily decline: the 2016-2017 AY saw 17,300 fewer beds delivered and the 2017-2018 AY is projected to be 3,900 less than the previous year. As available land within walking distance of universities becomes harder to secure and construction debt becomes less plentiful, we can expect the trend of fewer deliveries to continue.

Bellwether Forecast is Clear

The student housing bellwethers, American Campus Communities (ACC) and Education Realty Trust (EdR), recently released their final leasing statistics for the 2016-2017 AY, which further underscore the sector’s impending success. Student housing occupancy rates are typically higher than annual occupancy for multifamily assets, and ACC and EdR report same-store portfolio occupancy at 97.3 percent and 96.7 percent, respectively. Robust same-store rent growth projections, ACC at 3.5 percent and EdR at 3.4 percent, also indicate healthy performance.

What’s more, as enrollment continues to trend upwards and the U.S. government’s involvement in the student loan program, it’s less likely that another recession would have as strong of an impact on a student’s ability to afford tuition. This combination of events only increases the sector’s appeal.

So is “defensive” truly an appropriate classification for student housing product investments? For a product type that is supply constrained, enjoys annual occupancy in the 97 percent range, realizes annual rent growth of 3.5 percent, has a fixed resident base to draw from each year that continues to grow and can typically be acquired at a higher yield than its multifamily counterpart, the “best risk-adjusted return in real estate” seems more appropriate.