Jessica Ruderman
Real Capital Analytics
Credit markets froze following the financial crisis that hit in September 2008, and the commercial sector has been among the hardest hit.
Credit markets froze following the financial crisis that hit in September 2008, and the commercial real estate sector has been among the hardest hit; not a single property type has been able to avoid the downturn in investment activity. Student housing, an increasingly popular niche for investors, is no exception. Sales volume of properties to trade for $5 million plus in student housing properties hit bottom, with only 20 properties trading hands year to date for a total of $313 million. That marks a stunning 87% fall from 2008 totals, and it is also the lowest volume for the niche since RCA began tracking student housing in 2004. From 2005 to 2008, annual student housing volume ranged between $2 billion to $2.5 billion, and typically represented 2 percent to 3 percent of all apartment properties traded.
Despite the decline in volume this year, student housing sales this year have stayed true to this pattern, accounting for 2.8 percent of all apartment activity.However, cap rates for this niche have risen markedly higher than those for apartments as a whole. Student cap rates are up 140 bps, almost three times the 50 basis-point gain for apartment properties on average. Even so, pricing has held up more for this niche than for the broader apartment sector, with only a 3 percent drop on price per unit compared to a 13 percent per-unit slump for all other apartments.
Student Housing transactions with cap rates. Source: Real Capital Analytics
One indicator of the slow market: to date this year, no student housing asset has traded for $50 million or more; the highest price paid so far this year was the nearly $46 million sale of the Cottages of Lubbock, a 241-unit asset in Lubbock, Texas. The property was acquired by Campus Living Villages, an investor group based in Sydney, Australia, from Capstone Capital Corp.
The thin sales volume cut across the entire country; no region had sales above $100 million, although the Southwest came close and had the most activity five transactions totaling $99 million. Not a single student housing property has traded in the Northeast so far in 2009.
Typically, the public REITs have led the investment in this niche, but these companies have stayed out of the market, making no acquisitions to date this year. Private investors accounted for 62 percent of acquisitions. All but two deals involved just a single property. Only Westar Associates and Kayne Anderson Real Estate Partners were the exceptions, each acquiring two assets.
Student Housing transcation with number of properties sold.
Source: Real Capital Analytics
One area where student housing stands out on a positive note is distressed properties. The student housing sector is faring well compared to the entire apartment sector when it comes to the percentage of properties in trouble due to default, foreclosure or bankruptcy. Only 4 percent of the student housing sector is in trouble, less than half of the 8.7 percent of distress afflicting the overall apartment sector. There are a total of 25 student housing properties in distress, valued at nearly $350 million. Most of those – 15 in all, accounting for $225 million – are in the Southeast. The Northeast may have had no sales this year, but it also has no student housing properties that have fallen into distress.
All that being said, student housing will nonetheless remain a safe haven for investors. With more people returning to school during the downturn, many universities short of meeting housing needs, and state governments cutting back on construction budgets, this niche should prevail, especially as public REITs ramp up investment and smaller private players participate. In addition, the relatively small nature of the niche and low volume will together keep prices less volatile than those for the broader apartment sector.
— Jessica Ruderman is a senior analyst with Real Capital Analytics.