Austin, Texas — In 2020, the COVID-19 pandemic brought an unexpected interruption to the student housing investment sales market. Following a strong leasing season for fall 2021, executives are seeing increased interest from buyers and sellers in the space, leading many to wonder what the next two quarters of 2021 will look like.
In a discussion led by Kieran O’Shea, managing director of Eastdil Secured, at the InterFace Student Housing conference in Austin, Texas, last week, a group of industry-leading owners and brokers discussed expected transaction volumes through the end of the year and took a closer look at who is buying and selling in the space today.
Based on sales volume and pipeline, Teddy Leatherman, senior director with JLL, predicted that the period from now until the end of the year will exhibit the busiest sales transaction volume seen by the sector in recent years.
“When you add up the very impressive performance of the sector, the attractive underlying fundamentals of the space and the very attractive yield premium seen today, we expect to see an opening of the floodgates and a breakthrough of pent-up demand, which has been building over the course of the last year,” agreed Clayton Merritt, vice president with The Scion Group. “By the time we hit the fourth quarter, I hope the sector will have gotten to $7 billion to $8 billion in assets under management.”
For Fred Pierce, president and CEO of Pierce Education Properties, transaction volumes seen last year are indicative of growth to come. “I was surprised by the performance in the sector during the fourth quarter of last year — it was the third largest fourth quarter in the last seven years, even during the pandemic,” he said. “We came to a screeching halt during the second quarter of 2020 — Fannie and Freddie imposed their COVID-19 reserves, and as an industry, we really weren’t sure where the year was going to go from there.”
“Ultimately, student housing proved its resiliency last year and I think we’re going to see a huge fourth quarter in terms of investment sales in 2021,” continued Pierce. “We’re normally net buyers, but we even have a couple of properties that we’re taking to market during Q4.”
With the foundation of investment interest set, the discussion turned to who is buying and selling in the market today.
“In terms of capital entering the student housing space space, two-thirds of the family offices that are active today were founded after 2000 and their combined net-worth is over $10 trillion, so they have a lot of capital to spend,” said Leatherman of JLL.
“Hedging costs have also decreased, making foreign capital more competitive and we’ve seen institutions — which were a bit quieter during COVID — come back online,” she continued. “We’re going to see a lot of groups competing for a lot of deals this fall. There is $226 billion worth of dry powder that has already been raised and needs to be deployed in U.S. commercial real estate, and the way you get that out is through large transactions.”
Alongside new entrants to the space are the traditional buyers of student housing, which are also currently in the market to acquire, according to Andy Feinour, president of Student Quarters.
“The larger, New York City-based private equity firms and some of the traditional foreign capital sources are still playing in the space alongside a lot more new entry capital that wasn’t previously in the student housing sector,” he said. “The thought process is that you can buy a conventional property with a fairly heavy lift or a stabilized student property at roughly the same yields.”
“Three of our deals are all being sold to new entrants to the space that are conventional multifamily players, and we’re continuing to see new foreign capital looking to get involved as well,” continued Feinour. “The U.S. is leading the world in recovery from the pandemic, so it is seen as a great place to invest, and student housing performed with resiliency during the recessionary period.”
Troy Manson, principal of University Partners, agreed, reaffirming that a groundswell of transactions is already being seen and will continue through the end of the year.
“We had an acquisition under contract worth a fair amount of money at the start of the pandemic,” said Manson. “Being in the business, we knew we were going to be fine, but capital had to be convinced that students are going to pay rent and they’re going to come back in the fall. We were successful in doing so and we continue to see an opportunity to buy in the sector today. We have been about as active as anyone through COVID-19 and we think transaction volumes will only keep growing.”