“That story about student housing outperforming on sales volume does not hold water anymore,” says James Costello, senior vice president with research firm Real Capital Analytics.
Earlier this year it seemed like student housing properties were immune from the slowdown in investment sales. Sales for other property types had slowed dramatically compared to 2016. But the volume of single-asset student housing properties bought and sold in the first months of 2017 matched the beginning of 2016, which proved to be a record year for the sector.
No longer.
“That story about student housing outperforming on sales volume does not hold water anymore,” says James Costello, senior vice president with Real Capital Analytics (RCA), a New York City-based research firm. “It was the case through 2016 even as the apartment market faltered. Now though, deal activity is falling for student housing was well.”
Sales volume down for student housing
Investors bought and sold $1.9 billion in student housing properties in the first quarter of 2017, according to RCA. The figure is down 31 percent compared to the $2.8 billion in properties that sold during the same period the year before. The fall is roughly equivalent to the fall in volume that has hit property sales for apartments overall. Investors bought and sold $27.0 billion in apartment properties in the first quarter of 2017, down 33 percent from the year before.
That comparison includes portfolios of student housing properties. For a few months early this year, single-asset student housing properties were faring better.
But the latest data has brought sales of even these single student housing properties closer in line with the rest of the apartment sector, according to RCA. Sales of single student housing properties were down 26 percent over the first five months of 2017 compared to the year before. “April and May were particularly tough for student housing,” says Costello.
The reason for slow sales may be as simple as the law of gravity—what goes up must come down, at least a little.
“We had an amazing year last year,” says Dorothy Jackman, senior managing director for the national student housing group at real estate services firm Colliers International. “Yes, this year’s volume is going to be down compared to that.”
Investors bought and sold an estimated $10 billion in student housing properties last year. The activity included Harrison Street’s privatization of Campus Crest and Scion’s purchase of University House. Last year “produced the largest volume of transactions in industry history—double the next closest year,” says Frederick Pierce, president and CEO of Pierce Education Properties, an investor, developer and manager of student housing communities.
Experts predict that investors will buy $4.0 billion to $5.0 billion in student housing assets in 2017. If that happens, 2017 will still be a very strong year for sales in the sector. “That range brackets the highest volume years in industry history, excluding the anomaly that portfolio sales brought to 2016,” says Pierce.
Little yield premium for student housing
Student housing sales volume did grow much faster than apartment property sales volume overall in recent years. That’s because student housing offered significantly higher yields.
“The student housing sector offered a stronger yield opportunity than garden apartments—nearly 30 basis points higher,” says Costello. “With a better yield opportunity, capital followed.”
However, that premium yield has gradually shrunk. Cap rates on sales of student housing properties averaged 5.9 percent in March 2017, according to RCA. That’s just 10 basis points higher than the average cap rate for multifamily properties overall, at 5.8 percent. Before 2014, cap rates for student housing properties were at least 20 basis points higher on average than cap rates on apartment assets.
“Not surprisingly, sometime after the better yields on offer went away, so eventually did the stronger growth in deal volume,” says Costello.
Long-term demand
Even without a premium yield, investors are still eager to invest in student housing. That eagerness will keep the volume of deals from falling too far. “The market has an appetite to buy more. People are hungry for deals right now,” says Jackman.
“What matters most is that student housing in general is and will remain a technically and fundamentally sound investment class due to its recession-resistant investment characteristics, strong Generation Z demographic trends and sustained institutional and cross-border investor demand,” says John Strockis, senior vice president of acquisitions with SmartStop Asset Management, an asset manager that manages student housing, seniors housing and self-storage properties.