Within the multifamily sector, the student housing market is thriving, according to Struan Robertson, CRG’s Senior Vice President of Investments – Residential. A leader in financing and underwriting multifamily projects, he has navigated the challenges of higher interest rates and tight financing in 2023 and 2024 by employing creative joint venture and limited partner opportunities. That’s why IREJ turned to him for his insight into what developers need to know as they take on new projects in 2024.
IREJ: How would you summarize the current financing market for multifamily and student housing?
ROBERTSON: As with all types of commercial real estate, in 2023 and 2024, multifamily and student housing developers faced higher interest rates and more difficulty securing traditional financing. As a result, some developers have struggled to get projects off the ground. CRG has remained flexible and creative in finding more joint venture and limited partner opportunities that have enabled us to get deals started.
Fortunately, in the case of student housing, there is still a considerable demand. This is especially noticeable in about 15-20 markets, including Madison, Wis., where despite the addition of nearly 3,000 new beds for this coming school year, the market as a whole is 85% pre-leased, and our 534-bed Chapter Madison development near the University of Wisconsin-Madison is over 95%. Because of this kind of strong demand, new players are entering the sector but do not always have experience in student housing.
Our CRG team completed more than 50 student housing developments across the country with our last firm and delivered our first two with CRG in 2023: The Standard at Columbia, a 678-bed project near the University of South Carolina; and Academy at Reno, a 773-bed development at the University of Nevada Reno. This summer, we are wrapping up two more ground-up projects: Chapter Madison and Chapter Eugene, a 302-bed project near the University of Oregon. We have been able to tap significant capital raised by CRG to complete these projects and as noted above in some cases have taken on a JV partner to share costs and risk.
Although student housing development costs are high, as is true for most commercial real estate, the strong fundamentals in certain college-town markets have set student housing apart and allowed many of these projects to secure financing and start construction. By contrast, we’ve seen softer fundamentals in most markets on the conventional multifamily side, making new starts much more challenging. The markets with strong fundamentals for student housing typically have growing enrollments and/or a migration of students to modern, purpose-built products designed for them, driving pre-leasing and rent growth to levels that attract institutional investors.
While costs had been rising quickly – at their peak, about 18 months ago, we were seeing pricing escalate as much as 30-40% from just a year earlier – that escalation seems to have moderated in many markets, allowing for us to have more predictability again as to what our budget should be when we look ahead 12 or 18 months to the start of construction.
With The Standard at Columbia and our multifamily project located at 220 Ada in Chicago that we recently broke ground on, our parent company and builder on the project, Clayco, was involved in the project early on, and that offered additional transparency that further helped CRG with predictability on everything from cost to construction schedule. In addition, working with Clayco allows us to make real-time changes as needed to stay within budget. For example, we recently learned of increased tariffs on certain materials for a project already under construction; almost immediately upon hearing the news, team members worked with suppliers to figure out how best to mitigate the impact to our budget.
Even markets with high demand are rent-sensitive, though, so if costs continue to rise, we look for ways to offset them through design modifications that create efficiency without compromising quality. In some markets, labor costs are an issue; if there are even two to three projects in a smaller town, it can be harder to get labor, driving up costs. Sometimes, even with the strong operational fundamentals, costs may have moved too high to make our numbers work for CRG and our investors
Despite the unavoidable fluctuations in pricing and labor availability, our two projects this year are coming in on time and under budget, and we believe both will reach 95+% occupancy for the school year. We’re landing the plane despite all kinds of turbulence, and that’s the difference between an experienced developer and one newer to the space.
IREJ: What kind of industry shift(s), if any, have you seen in student housing?
ROBERTSON: We see incremental shifts that play out over the course of several years. A decade ago, the biggest party rooms were essential; now, we’re seeing more demand for study spaces, meeting rooms and other more practical offerings.
We also feel that with the increase in rent over the last few leasing cycles, housing affordability is a bigger consideration today than in the past. For example, students may be willing to forego a window in exchange for cheaper rent in some markets. We are always studying how to introduce lower rent structures within a building to attract a broader resident base, but that can be challenging. In our Chapter Madison project, we designed some interior semi-private bedrooms to allow us to have a deeper floor plan, therefore increasing density slightly but also giving us an entry-point rent of less than $1,000 per month — and those beds sold out in the first two weeks of leasing. Opportunities like this are about finding the right balance between increasing density and/or pushing the envelope and ensuring the product works for students today. We work closely with our leasing team as we study design alterations such as this.
IREJ: What do you think developers should focus on as we start the second half of 2024?
ROBERTSON: Although university student enrollments have declined since 2018, in the top 20 markets, full-time enrollment is still outpacing student housing inventory, with 1.34 students for every bed, according to a report earlier this year by Walker & Dunlop. This supports the record-setting rent increases of recent years and additional development. Most schools in the top 20 markets are major tier-one institutions welcoming record enrollments. But as with all developments, it is crucial to pay attention to future supply and how that can impact demand, and to factor that into the lease-up assumptions in your underwriting. Supply can come in waves and impact leasing in certain years, but we believe the long-term fundamentals of our target markets and do our best to plan accordingly.
IREJ: What would you like IREJ readers to take away from this conversation?
ROBERTSON: The return of international students is also spurring growth in the big tier-one schools. More than 1 million international students studied at U.S. colleges and universities in 2022-2, up 12% from a year earlier, according to the Institute of International Education, and bringing international enrollment almost back to pre-pandemic levels.
Lastly, it’s important to have a strategy specifically tailored to each individual location in each specific market, and that goes for both multifamily and student housing. With student housing, though, there are more variables to factor in with the programming of the building (for example, you could build anything from micro studios up to six-bedroom units, and it’s crucial to make sure you have the right types, sizes and mix of units) that can drastically impact the viability of a project. It’s imperative for us to lean on our experience as well as that of our partners and operators to ensure we pursue the right strategy for each project.
