Over the last ten years, the student housing market has been a hot topic among investors. The industry has seen steady growth, and, in 2016, it boomed with record transaction activity volume of nearly $10B in sales. Now, student housing investing has entered a more mature and institutional focused investment cycle, which may leave some wondering if the industry will offer yields that are worth the investment.
While the cycle has matured, student housing will be a smart investment for years to come, largely due to its demographically-driven demand versus the economically-driven demand of the four “food groups” of real estate – office, retail, industrial and multifamily. Despite consistent talk of rising tuitions and momentous student debt rates, universities across the nation are experiencing increases in college enrollment. According to Axiometrics, enrollment in the U.S. has increased by 6.4 million students in the last 20 years, and, looking ahead, full-time undergraduate enrollment is expected to grow 11.8% from 2016 through 2026, an increase of 1.12 million students, according to the National Center for Education Statistics.
These numbers are encouraged by the fact that higher education provides proven value in terms of higher post-college earnings for recent graduates. According to a study by the Pew Research Center, in 2012, the median annual earnings of Millennials (those born after 1980) between the ages of 25-32 with a bachelor’s degree was $45,500 versus $28,000 of those with only a high school diploma. This is the highest median salary and wage gap since studies began in 1965.
Given the demographic demand driver versus the economic demand drivers, student housing exhibited its recession resiliency on an extraordinary level during the Great Recession. Using Publicly traded REIT Net Operating Income (“NOI”) as a proxy, between 2007 and 2010, student housing NOI increased by 11.9%, whereas conventional apartment NOI decreased by 3.4%. As illustrated by this measure, investing in student housing provides downside protection and portfolio diversification as performance drivers different than traditional asset classes.
In addition, today’s students increasingly come from higher income households, with 80% having their own bedroom and 50% having their own bathroom. Highly amenitized, professionally managed, purpose-built student housing properties appeal to the desires of these students, and, perhaps more importantly, to their parents. Gone are the days of sharing a 60-year-old 2-bedroom / 1-bath house with four roommates. Today’s students want quality of service and construction.
And, when it comes to returns, student housing yields are premium to traditional apartments. Historically, student housing has transacted at yields approximately 25 – 75bps above traditional apartments. Currently, the five-year average cap rate premium is 50bps, according to CBRE.
For interested investors, demand is still strong, and the fractured nature of the market offers opportunity for investment. Today, according to Axiometrics, the top 25 owners in the student housing market represent only 10.2% of total off-campus supply at the top 175 universities, leaving nearly 90% of the market ripe for acquisition.
Though student housing has reached a more normalized investment cycle, all evidence points to the fact that the market will continue to mature in the years to come, providing a smart, stable opportunity for those looking to diversify their portfolio and achieve a solid return on investment.