COVID-19 Led to Higher Vacancy Costs and Concessions in Student Housing

Student housing operators were adversely affected by the COVID-19 pandemic in 2020, according to a report issued Monday by the National Multifamily Housing Council (NMHC).

The 2021 NMHC Student Housing Income and Expense Survey includes detailed descriptive statistics for the 2020 calendar year income and expense statements of 953 private off-campus student housing properties, encompassing nearly 185,000 units and 529,000 beds across 47 states.

In 2020, many properties incurred higher vacancy costs and offered increased concessions in order to attract tenants. 

Among a set of same-store properties, vacancy expenses as a percentage of gross potential rent increased between 2018 and 2020 by a median of 1.4 percentage points. 

More specifically, a majority (61.5 percent) of properties recorded an increase in vacancy costs over the two-year period. Similarly, nearly half (44 percent) of properties increased their concession offerings as a percentage of GPR over the last two years, compared to just 28.1 percent of properties that lowered their concessions (the remaining 27.9 percent of properties did not offer concessions in either 2018 or 2020). 

Nevertheless, because of higher rents, the median same-store property still saw their per-bed net rental income increase by 1.4 percent between 2018 and 2020 (though, the median same-store property also saw their gross profit margin decrease slightly over the two-year period).

Campus Adjacent and High-Rise Properties See Higher Net Rental Income

The median small property (fewer than 300 beds) reported noticeably lower vacancy costs – just 5.6 percent of gross potential rent – compared to medium and large properties (9.3 percent and 9.1 percent, respectively). Properties in the Mid-Atlantic region also recorded relatively low vacancy costs, with a median of 5.2 percent of gross potential rent. 

Properties located within a quarter mile from campus recorded a median net rental income of $8,320 per bed, while properties that were two or more miles off campus had a median net rental income of just $5,924. High-rise properties, similarly, reported a higher median net rental income ($10,706 per bed) relative to mid-rise properties ($8,734 per bed) and garden-style properties ($6,003 per bed)

Lower Vacancy Costs for Mid-Atlantic and Small Properties

The median small property (fewer than 300 beds) reported noticeably lower vacancy costs – just 5.6 percent of gross potential rent – compared to medium and large properties (9.3 percent and 9.1 percent, respectively). Properties in the Mid-Atlantic region also recorded relatively low vacancy costs, with a median of 5.2 percent of gross potential rent.

Concessions Greater in Southeast and Garden-Style Apartments

Garden-style properties incurred higher median concession costs – 1.5 percent of gross potential rent – compared to both mid-rise (0.6 percent) and high-rise (0.4 percent) buildings. Concessions were highest in the Southeast, with a median of 1.38 percent of gross potential rent, and lowest in the Northeast (0.19).

Operating Expenses Lowest in Newer Properties

Median total operating expenses amounted to 46.9 percent of net rental income among properties built 2016 or later and 51 percent among properties built from 2011 to 2015. The median property built prior to 2011, meanwhile, recorded total operating expenses at 58.9 percent of its net rental income.

Power 5 Conference Schools Have Greatest Demand

In comments not directly related to the NMHC report, but on the current state of student housing, Paul Letourneau, Manager, Commercial Lending, Alliant Credit Union, tells GlobeSt, “The student housing market is experiencing renewed activity, especially properties located near campuses of Power Five conference schools, where demand has outpaced current supply.”

He said that low interest rates have motivated borrowers to acquire newly built or value-add opportunities, as well as refinance existing property loans under more favorable terms today.

“The past 18 months have demonstrated that experienced sponsors will be well positioned to ride out turbulent times when they seek out flexible financing structures and partner with balance sheet lenders that meet their needs.”

The pandemic also revealed the student housing market’s resilience—students want to live the campus life, Letourneau said.

“Full-amenity student housing properties located close to campus at the top ranked universities are experiencing strong demand and favorable pre-leasing activity,” he said. “Barring any downward enrollment trends or changes in university rules related to on-campus living, demand will remain strong for these coveted properties.”

And Parker Champion, Chief Operation Officer, Champion Real Estate Company, tells GlobeSt, student housing as a whole drives higher investment returns compared to traditional multifamily and historically has offered investors strong downside protection.

“However, not all student housing investments are equal,” Champion said. “Investors should be cautioned at chasing yields at lower-tier universities with lower barriers to entry as they can be more susceptible to drastic swings in student demand.”

At Champion, “we focus on Tier 1 universities with more than 20,000 full-time students and have Division I athletic programs. Our investments at these universities are all walking distance to campus and at the center of the social scene,” he said. 

“By sticking to these guidelines, we believe we can secure the downside risk most recently demonstrated by achieving over 90% occupancy across our portfolio for the 2020/2021 school year despite the pandemic and over 95% occupied for the current school year. 

“Similar to high-end multifamily, class A student housing has also been experiencing a growing hospitality component requiring more hands-on management. Investors should make sure to properly vet deal sponsors and their management team to ensure proper resources are available for management success.

“We recommend partnering with best in-class, third-party student housing operators [as we do] with deep experience in each market to ensure each investment has more than sufficient resources for success.”