Austin, Texas — With approximately $10.35 billion in total sales volume and 174 individual transactions, 2016 was the highest sales volume year on record for the student housing industry, according to a year-end report by Austin-based FourPoint Student Housing Investments.
The sales volume seen last year surpassed 2015 — the previous sales volume record holder — by a multiple of two. Two transactions — The Scion Group, CPPIB and GIC's acquisition of the University House Communities portfolio and Harrison Street's acquisition of the Campus Crest Group portfolio — accounted for a large portion of the volume in 2016, though not a majority.
Other portfolio sales also played a role in the overall transaction activity, which show a total of 135 properties trading hands within five major portfolio transactions.
“We’ve also seen the highest price-per-unit, -bed and –square-foot that we’ve seen, on average, across the entire student housing industry,” says Chris Bancroft, principal of FourPoint Student Housing Investments.
Cap rates remained at record lows for all product types in 2016, with the market experiencing cap rate compression — specifically for Class B and C products. Despite a spike in interest rates at the end of the year, the US Treasury rates also remain low.
FourPoint notes that this, along with increased appetite for student housing investment from a wide array of capital sources, helped push new investors into the student housing space.
Foreign capital sources made an aggressive push in the student housing market in 2016, purchasing several large portfolios. “I was surprised by the percentage of buyers that were foreign equity-driven,” says Chris Epp, principal of FourPoint. “We’d always kind of heard about it coming. For the past three years there has been this build up of foreign capital wanting to deploy into the space, but this is the year that they actually did it.”
“In 2016, 25 percent of the deals that traded hands were foreign capital,” continues Epp. “In 2015, not one truly foreign capital player acquired a property, or if they did, it was not worth noting.”
CMBS lenders continue to play a significant role in the overall capital markets space, with FourPoint paying close attention to the performance trends of loans originated from 2008 to today. The next significant spike in maturities for 10-year term loans occurs in 2025.
The company notes that we are starting to see a large amount of CMBS-financed assets reach loan maturity, and a corresponding number of value-add assets brought to market as owners in these scenarios seek a viable exit.
Over 200 new properties totaling approximately 93,000 beds will be delivered in student markets across the U.S. in 2016 and 2017. As predicted, there will be no slowdown whatsoever by developers.
FourPoint notes that development activity is occurring across the country in virtually every student market, and developers are pushing the envelope on design and amenity features while keeping an eye on pedestrian locations to campus.
“The development pipeline continues to be massive and shows no signs of slowing down,” says Bancroft. “Next year, there are more slated developments in the pipeline than there are currently for this year.”
The report also notes that securing construction financing is becoming increasingly more difficult, and construction costs are continuing to rise, which will inevitably slow the future construction pipeline.
“I’d say that 2016, in terms of just sheer volume, is going to be very difficult to duplicate,” says Epp. “What I do predict now that foreign capital is accepting of student housing is that the complexion and the make-up of buyers is going to be far more varied than it has ever been. I feel like more and more folks are going to come into the space.”
“We expect to see a tremendous amount of demand for value-add product in 2017,” says Bancroft. “There have been so many new deals delivered to the market that have a story behind them, and that fits the profile for a very narrow range of buyers that are willing to pay low cap rates and are willing to pay up. That segment of the market has been generally underserved relative to the Class A space.”
— Katie Sloan