Real Capital Analytics
Student Housing sales activity is rising in certain areas.
Is the student housing market coming back? Every sector has been hit hard since the credit crisis, and this property niche has been no exception. The volume of student housing sales hit bottom in 2009, with only 28 properties valued at $5 million or above trading hands for a total of $424 million. So far in this year, the sales of 16 properties have already yielded $433 million, or 2% above the volume for all of last year. In addition, price per unit in 2010 has reached above $150,000, the highest level recorded since RCA started tracking student housing data in 2004. Although both the number of properties traded and sales volume have dropped a hefty 83% since the peak of $2.5 billion in 2005, the sector has clearly begun to return along with the broader market. Student housing now comprises 4% of all apartment sales, well above the 2% to 3% that it made up during the market’s peak from 2004-2007.
However, cap rates for this niche rose to 8.4% in 2009, or 140 bps above average rates for the overall apartment sector in the same period. Student-housing yields are just beginning to decline, but though they have slipped to 8.2%, overall apartment caps have declined at the same rate and remain 140 basis points below those for student housing.
Changing deal size is also a strong indicator of renewed appetite. While no properties traded for more than $50 million last year, so far in 2010 there has been one acquisition that crossed this threshold. The highest price paid year to date has been for Founders Hall, a 733-bed complex, which traded in January for $134 million.
Sales volume in 2009 was so thin that no region had over $125 million in transactions. So far this year, activity in both the Northeast and Southeast has surpassed that level. The region with both the highest dollar volume and number of trades is the Southeast, with $172 million in volume and seven trades.
Typically, the public REITs have led investment in this niche, but these companies have surprisingly stayed out of the market, making no acquisitions over the past 12 months. Private investors accounted for 67% of acquisitions, while universities have made up the remaining 33% in deals. So far in 2010 all deals involved single assets, with the exception of private fund Intercontinental Real Estate’s acquisition of two assets in Goleta, California.
One area where student housing stands out on a positive note: distress. The student housing sector is faring well compared to the entire apartment sector in terms of the percentage of properties falling into trouble due to default, foreclosure or bankruptcy. Only 5.5% of the student housing sector is in trouble, less than a quarter of the 24.1% of distress afflicting the overall apartment sector. So far in this cycle, only 27 student housing properties valued at nearly $497 million have become distressed. Most of those – 17 in all, accounting for $319 million in value – are in the Southeast and Southwest.
Indeed, student housing is likely to remain a relatively safe haven for investors. With more people returning to school during the downturn, many universities have found themselves falling short of meeting housing needs at the same time that state governments are cutting back on construction budgets. This niche should prevail, especially as public REITs ramp up investment and smaller private players participate.
— Jessica Ruderman is Director, Research Services, with Real Capital Analytics.