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Investors are flocking to student housing for a plethora of reasons. A large and increasingly college-bound population, set against a backdrop of underinvestment in on-campus housing, has created a shortage in housing for college students in many markets. The student housing sector continues to demonstrate strong fundamentals, maintaining a national occupancy rate of above 95% and average annual rent growth of 2.3%. What factors are driving the growth that we're seeing in the student housing market and how much can we expect the student housing market to grow over the next 5 years? Glad you asked.

Student housing has long been a relatively small sector of the real estate investment market. But thanks to growing enrollment at colleges and universities and an increasing shortage of on-campus, university-owned housing, student accommodations are attracting the interest of both traditional and nontraditional real estate investors.

"Student housing has moved from the back row of the multifamily sector to the head of the class," said Todd Goulet of KeyBank Real Estate Capital®. "The past few years have seen a wave of new high-end development on campuses across the country, coupled with intense interest from institutional investors."

Growth Even During the Recession

That intense investor interest is driven by the fact that unlike other real estate sectors, the student accommodation industry stayed resilient through the Great Recession.

According to a recent article in National Real Estate Investor Online (NREI), apartment property prices declined by about 20 percent, but average prices-per-bed for student properties stayed strong. One of the major investors in student accommodations, American Campus Communities (ACC), had 48 consecutive quarters of same-store revenue growth during the recession.

The volume of investment sales in the student accommodation sector was brisk in 2017, particularly in the last quarter of the year — so much so that most believe it will reach $8 billion by the end of the calendar year, NREI noted. "That would make the volume of investment sales in 2017 the second-largest in the history of the student housing sector, second only to the more than $10 billion in 2016."

More Students Are Driving Growth

While there are many factors driving growth in the student accommodation sector, one of the main factors is demographics, which will continue to drive demand in years to come. Enrollment in post-secondary institutions grew by 17 percent from 2004 to 2014, according to The National Center for Education Statistics. That enrollment number is expected to climb 15 percent from 2014 (the latest year for which there is data) to 2025.

The number of international students attending U.S. colleges and universities also continues to grow. International students account for roughly five percent of the 20 million students enrolled in U.S. universities, according to The Institute of International Education, but make up as much as 15 to 25 percent of the enrollment at some major state universities.

Outdated Dorms Are Out

With this influx of students — particularly tech-savvy, perk-conscious Millennials — comes the need for new, modern student homes to replace the old, outdated dorms currently found on most college campuses. "There's a high demand for newer amenitized, nicely furnished housing near campus," J.J. Smith, president of CA Student Living told the New York Times.

However, state budgets recovering from the recession have been — and still are — tight. According to a Center on Budget and Policy Priorities study, 46 of the 50 states still have tighter education budgets than before the recession.

In response, many universities and colleges have public-private partnerships to meet their student accommodation needs — investors and REITs (Real Estate Investment Trusts) have filled in the gaps.

What Real Estate Investors Need to Know

The student housing sector has faced some headwinds this year, starting slow through most of 2017. However, several large deals and acquisitions from the major REITs in the last quarter of the year (including a $591 million, seven-property deal by ACC) has buoyed the sector a bit.

Another potential headwind could be an oversupply in certain markets as more and more developers move into the sector. However, labor and construction constraints after successive hurricanes in two popular student accommodation markets — Texas and Florida — offset that construction fervor and possible over-saturation.

Nevertheless, investments in student accommodations have rewarded investors with higher yields and lower volatility than other real estate sectors in recent years, and there are plenty of reasons for investors to add them to their portfolio. A lender with a long-term relationship approach can help investors and developers wade through the range of debt capital providers to take advantage of the rising demand, and the many developments and acquisition opportunities happening in this sector. To learn more, contact Todd Goule at 617-385-6262.