The Expert: Student Housing Outlook Remains Healthy

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The student housing market continues to grow, despite a struggling economy. College enrollment remains on an upward trajectory and is expected to increase 8 percent over the next four years. Despite the recession, more than 15 million additional degreed workers will be needed nationwide through 2012 to replace retiring Baby Boomers, and this should further stimulate demand for higher education and, in turn, student housing.

Another driver of student housing demand is the continued expansion of the college-aged population, which is expected to grow 4.2 percent through 2012. There are some pressures in the near term, however. The subprime meltdown and ensuing recession have taken a toll on private-sector student loans, exacerbating the strain of education expenditures. An estimated 140 lenders have stopped making federal loans, and 40 private lenders have curtailed educational funding. Additionally, deflating home values, coupled with the tendency of Baby Boomers to rely on home-equity loans for college funding, will make paying for school even more difficult. These trends could negatively impact the ability of off-campus housing operators to achieve solid rent growth in the coming year.

Due to high construction costs, most universities have been unable to keep up with mounting housing demand. Developers have responded with the delivery of more than 57,000 beds since 2000, while an additional 23,000 beds are forecast to come online by the end of 2009. Off-campus housing trends have become more upscale, as students now look for amenities typically associated with apartment living and that rarely exist in dorm environments. These amenities include sand volleyball courts, basketball courts, fitness centers, movie theaters, tanning beds, video game facilities, business centers, full-size washers and dryers, high-end furnishings and study lounges. Builders also are tackling mixed-use student housing projects; University Village in Ann Arbor, for example, will combine 1,758 beds with over 16,000 square feet of retail space.

Despite heightened levels of construction, robust demand has kept vacancy from rising significantly, maintaining upward pressure on rents. Still, vacancy in student housing complexes has increased 200 basis points over the past year to between 6 and 7 percent. Additionally, properties that traded in 2008 registered an average occupancy rate of 92 percent, compared with 95 percent for the preceding year. Rental rates, however, continue to climb and are up 3 percent from one year ago. Depending on the number of beds in the unit, rental rates range from just below $300 per bed for modest quarters in tertiary locations to more than $1,500 per bed for newer, well-appointed accommodations in primary markets.

Cap rates average 50 to 100 basis points above levels posted a year ago. For Class A student housing assets in primary markets, they have remained relatively stable during the past 12 months; however, cap rates for Class C properties in tertiary areas have risen at least a 100 basis points. As such, overall cap rates have ticked up to 7.2 percent.

Highlighted by American Campus Communities’ $1.2 billion, 67-property acquisition of GMH Communities Trust, dollar volume for 2008 rose 27 percent over the prior year. Notwithstanding this sale, transaction activity, while off 35 percent from 2007, outperformed apartments overall last year. Average per-bed prices continue to hover in the mid-$38,000 range, although many investors are now actively pursuing distressed assets.

CPOnline March 2009