Student Housing Owners’ Fall Focus

Student housing has been no stranger to the impacts of the pandemic. Like other commercial real estate sectors, student housing owners were blindsided by the onset of the coronavirus outbreak and economic shutdown in March 2020, which caused widespread school and business closures and forced many students to return home early. For operators, the damage was compounded when universities had inconsistent reopening policies in the fall. While the market will likely continue to recover through the spring semester, there is a bright light ahead: fall semester 2021.

Student housing owners are anticipating renewed confidence in the second half of 2021, which will bring stronger demand and higher occupancy rates, as well as modest rent growth.

“We expect to see a potential spike in fall 2021 enrollments, as both the 2021 high school graduating class, as well as those in the 2020 class who did not attend college this year, both apply for the 2021-2022 school year,” Frederick W. Pierce, IV, president and CEO of Pierce Education Properties, says. “That will put pressure on residence halls and will push more housing demand off-campus next year, as well. We also project a resurgence in international enrollments for the academic year 2021-2022.”

Patrick McBride, managing partner of Coastal Ridge Real Estate, a commercial real estate investor with a significant student housing portfolio, has also seen renewed confidence for the fall 2021 semester. However, he predicts that the fall demand will likely undermine demand in the spring, which is expected to be modest.

“A lot of students and guarantors are looking past COVID and are comfortable signing leases for next fall,” McBride states. “However, there are enough students waiting to sign leases that there will likely be an impact in the first semester leasing velocity, leaving student housing owners and investors anxious going into the spring semester.”

McBride is, however, encouraged by international student enrollment activity. The outcome of the presidential election will likely help to support additional increases in international student enrollment. “International students are a critical component of not only off-campus student housing demand, but of the financial health and stability of the universities themselves,” he says. “While international students account for approximately 5% of post-secondary education enrollment in the US, they contribute approximately 15% of universities’ gross revenues. Without them, the landscape of large universities, especially those with a heavy weighting toward international students, would likely change if they ultimately did not return.”

The pandemic alone didn’t hamper international student activity. Under the Trump administration, international enrollment slowed significantly. Under a Biden administration, students from other countries will feel more welcome matriculating to universities in the US, according to Pierce. “International students believe that America offers the premier higher education system in the world and they want to come here, if they feel welcomed,” he says. “In that regard, the biggest question will be what happens with our diplomatic relations with China under a Biden administration, as in recent years, 35% of international students studying in the US have come from China.”

Student housing operators are also encouraged by the rollout of three vaccines, which will support enrollment of both international and local students. It “will have positive impacts on the re-opening of the economy, businesses, schools and colleges,” says Pierce. “While recent spikes in the virus have temporarily increased governmental restrictions, I expect that to be short-lived and the availability of the vaccines will start to be felt in early 2021.”

A Perfect Storm

The combination of the presidential election results and the release of a vaccine will create a perfect storm for growth in student housing, although it may not hit until the end of the year. “If the US can manage COVID and the respective media headlines, I’d anticipate we see some stronger occupancy attributed to international students and a return of demand from local students that elected to stay home or commute to school for the 2020-2021 academic year, due to financial pressures and remote learning options,” says McBride.

The economic climate could also play a role in fueling demand for student housing. During a downturn or weak job market, many students choose to extend their educational experience and some young professionals decide to return to academics. Pierce believes this could be a quiet driver of demand next year. “With the recession expected to continue, the 2021 college graduating class will again face challenges in finding employment and that will again bolster enrollments in graduate school,” he adds.

Data from the National Multifamily Housing Council supports this theory. The US Student Housing 2020 report, produced by the organization, suggests that post-secondary enrollment rises during recessions. In the last decade, following the 2008 Financial Crisis, university enrollment spiked when unemployment rates hit 10%. Through the recovery, four-year universities continued to see an increase in enrollment, and in total, post-secondary education increased 2.1% in the last decade.

With these factors at play, Pierce is projecting a 3% rent growth for the 2021-2022 academic year, with his portfolio occupancy reaching 95%. “For next year, we expect off-campus occupancies to be high, rent growth to be strong and generally think that the academic year 2021-2022 will be a good year for student housing,” he adds.

COVID Learning Curve

Universities have been criticized for mishandling the pandemic with inconsistent policies and a lack of transparency that created a ripple effect for supportive businesses. In some instances, universities—including the University of North Carolina, University of Notre Dame and Michigan State University—re-opened for in-person learning only to shut down weeks later in response to outbreaks. Pierce, however, says that these instances were part of the COVID-19 learning curve. Universities pivoted in the spring and summer but had largely figured it out by the fall semester. “As the fall semester progressed and the availability of testing and contact tracing expanded, universities were acting more uniformly in regards to coronavirus policies, strategies and actions,” he says. “Most are now doing testing, contract tracing, social distancing and regular disinfecting.”

That being said, Pierce does see room for improvement in the way that local health organizations share data about the virus. As universities design policies around such data, Pierce has found misleading reporting to be an underlying factor in university closures. “The collection and reporting of data, on the other hand, by regional health authorities is very inconsistent around the country and in many instances has created a false narrative about students and the virus,” says Pierce. “In selected instances, I believe some universities have overreacted to spikes in positive tests. Where positive tests have increased, students have quarantined, generally not become very ill and quickly recovered.”

For many student housing operators, the learning curve did not have a material impact on portfolio performance. This is true for both Pierce and McBride. Pierce’s portfolio had a no-show rate of less than 1% and rent collections of 99%. “Whether universities were primarily online, hybrid or primarily in-person, the students still came to school, moved in and have paid their rent,” he said.

McBride saw an impact in Coastal Ridge Real Estate’s student housing portfolio early on in the pandemic, but the firm pivoted quickly to respond to market-specific challenges. “By late summer, as universities had come out with their reopening plans, the impact became very market specific. International student leasing came to a halt, and we saw some local students elect to stay at home to save money if they knew their classes would be delivered mostly online, impacting occupancies in universities near major MSA’s,” he said. “Our team’s heavy focus on proactively identifying and backfilling expected no-shows allowed us to have near normal no-show rates and a slight pick-up in year-over-year portfolio occupancy.”

Strong Performance

Social distancing regulations also helped to drive occupancy in student housing this year. As universities reduced on-campus housing capacity to comply with local regulations and CDC guidelines, many students were pushed from on-campus housing to off-campus housing. “Universities de-densified residence halls this year by 20% to 50% or more, and offered quarantine facilities for on-campus residents,” says Pierce. “In instances where universities de-densified the on-campus housing capacity, demand was pushed off-campus. We secured 170 leases at Michigan State and over 100 leases at San Diego State as a direct result of dormitory closures.”

This activity isn’t anecdotal. Research from JLL also supports strong student housing performance. In fact, rents increased 2.1% in the fall semester, falling only marginally from 2.7% rent growth in the fall semester 2019. Occupancy levels, on the other hand, have decreased 3% year-over-year, but still fell in the mid-90% range. “If you look at the data and facts, the asset class is performing very well,” states Teddy Leatherman, a director at JLL. “In the grand scheme of things, this delta is very minimal and speaks to the resiliency for the sector.”

This resiliency is even more defined when backlit against multifamily performance during the pandemic. For some, the student housing sector has outperformed the apartment market, which had 95% average rent collections, according to data from NMHC, while student housing collections have been more robust. “The differences become more pronounced as you move down the quality spectrum in conventional apartments into class B and class C apartments, where collection rates progressively declined,” says Pierce. “Student housing has certainly demonstrated its recession-resistant characteristics and also reinforced the value of parental guarantees.”

Other experts, however, found that student housing has performed on par with the apartment market, as both housing segments have shown resilience during this downturn. Coastal Ridge’s senior housing portfolio also outperformed apartments in terms of rent collections, occupancy and rent growth, but McBride noted that student housing performs on a different schedule than the apartment market. A lot will be left up to 2021 performance. “Student housing presents a unique profile given it fully leases-up every year,” McBride says. “While performance has been strong to-date, we are approaching another inflection point as we start pre-leasing for the 2021-2022 academic year. We hope the recent news of vaccine distribution will bolster leasing in 2021-2022, but short- to mid-term performance will be highly dependent on how COVID impacts the 2021 spring semester and ultimately, the leasing for the 2021-2022 school year.”

Meek Investment Sales

Overall, JLL found the student housing and apartment markets to perform similarly, in terms of rent growth, rent collections and occupancy. However, the firm’s investment activity has been much more robust in the apartment market than in student housing. “Even though the asset classes have performed similarly through COVID, the multifamily sales market is incredibly robust as lenders are very aggressive on this product type,” says Steward Hayes, a director at JLL.

This year, student housing investment sales volumes are a meek $2.5 billion; significantly lower than the $8 billion average annual sales volume over the last five years, according to JLL’s Hayes. “We have experienced a lower trade volume this year, largely attributed to the debt markets and the uncertainty in the market. However, the student housing sector is performing better than expected, which gives our team a bullish outlook on 2021.”

Investment sales volumes are starting to look up for this year. Investment capital is showing a renewed interest in student housing opportunities. Scott Clifton, a director at JLL, says that inquiries toward student housing have grown significantly in the last two months, and he expects the activity to gain momentum in 2021. “BOV activity has picked up significantly over the past 60 days and we have experienced a migration of capital, meaning there are new entrants looking to place capital in student housing,” Clifton says. “Based off of our BOV volume and the amount of dry power sitting on the sidelines, we expect 2021 to be a very busy year.”

Pierce has also seen a rise in opportunities for student housing investment, and he is bullish on the market next year. “There will be many opportunities for student housing investments in 2021,” says Pierce. “The headlines related to high-profile universities pivoting online, like Harvard, North Carolina, Michigan State, UC Berkeley and USC, closing of on-campus residence halls and spikes in positive COVID-19 tests amongst students—although it has been a very low as a percentage of all students—have pushed many institutional investors to the sidelines in 2020 as it relates to student housing. For those who understand that student housing has fared extremely well during the pandemic and has again proven its recession resiliency, they will find less competition for student housing investments in 2021. That is a formula for good timing.”

Policies and Politics

Some of this optimism is dependent on university policy and local regulatory response to the pandemic. Early on, university response—including decisions to adopt distance or in-person educational models—was one of the big unknowns for student housing operators. Today, policy continues to fluctuate between geographic markets and university systems. “The approach still varies widely across the universities in our portfolio, but most have settled into their respective plans,” says McBride. “The spring and summer [of 2020] was challenging because each university was making indications on what they planned to do, but without practical detail of how it impacts individuals and their corresponding plans, which left students in a holding pattern. Communication has gotten better throughout the fall semester as it relates to what’s happening in the immediate future, but we haven’t seen much affirmation of plans for the spring.”

However, Pierce expects that the politicization around the pandemic will moderate following the inauguration in January, leading to a reduction in business closures and government mandates. “Generally speaking, COVID-19 will quickly become de-politicized this spring now that the presidential election is behind us,” says Pierce. “Given that, and the development of vaccines, both parties should be motivated to open up our economy this spring. Whether or not that brings a return to more in-person instruction in the spring remains to be seen, but I would expect a significant return to in-person instruction by the fall.”

The student housing story is an optimistic one, but operators are still prepared for a bumpy beginning of 2021. Strong operations and investment activity are both expected, particularly in the latter half of 2021, but operators are watching some of these highlighted uncertainties—like university policy, international student enrollment and vaccine distribution—closely. Anyone of these factors has the power to shift the course of student housing for the next academic year.