Certain commercial sectors have performed well even during the COVID-19 pandemic, most notably industrial and multifamily. But they’re not the only commercial classes that are thriving today. Student housing is on a hot streak, too.
What’s behind the strong performance of student housing, even after so many universities and colleges suspended in-person classes last year? Fred Pierce, president and chief executive officer of Pierce Education Properties in San Diego, points to the big reason: Demand is up today for both on-campus and off-campus housing as students yearn to return to in-person education.
Here are some of Pierce’s thoughts on the present and future of student housing.
What has surprised you about the student housing sector during the COVID-19 crisis?
Fred Pierce: Perhaps the surprise is that student housing insiders were not surprised. The student housing sector has proven once again that it is recession resistant. And this time, even pandemic resistant. During the pandemic, occupancies remained high, with only a 3 percent decline in occupancy for Fall 2020, which has been recaptured and then some in Fall 2021. Collections were high at 98 percent to 99 perceent for our portfolio in Spring 2020 and Fall 2020, respectively. And the show-up rate was approximately 99.5 percent. Student housing collections outpaced multi-family by 200 to 300 basis points during the pandemic.
What may surprise the investment community is that the method of course delivery, ranging from substantially in-person to hybrid to substantially online, had no material impact on off-campus occupancies. Rather, the university markets which experienced declines in off-campus occupancies were in states and at universities where politicians and university administrators had confusing or negative messaging regarding COVID-19-related lock downs. Picture California and Michigan, in particular.
How do you see the student housing industry now, more than 18 months into the pandemic?
Pierce: The student housing sector has performed second to only industrial during the pandemic. Concerns about university course-delivery methods and closing of on-campus residence halls, if anything, had either no impact or a positive impact on the off-campus student housing sector during the pandemic. Debt and equity capital for new acquisitions and development initially seized-up in the second quarter and third quarter of 2020, but began flowing again with fourth quarter investment sales of about $2.5 billion, reaching the third-highest fourth-quarter volume in the last six years. Capital is flowing into the sector in 2021 at historic levels as multifamily cap rates have compressed into the 3s and even high 2s and student housing looks comparatively cheaper.
How has the pandemic impacted on-campus versus off-campus student housing communities?
Pierce: On-campus student housing has been dramatically impacted during the pandemic. In Spring 2020, virtually all American universities closed their residence halls starting in April and sent their students home for the balance of the academic year while providing ratable rebates of housing fees. In response to social-distancing protocols, the typical university “de-densified” their on-campus housing for academic year 2020-21 by somewhere between 20 percent and 50 percent, representing a similar loss of housing revenues. Most universities have increased on-campus housing occupancies for academic year 2021-22, but not yet to pre-COVID levels. Most are expected to be back to pre-COVID on-campus occupancy for the 2022-23 academic year.
Conversely, off-campus student housing occupancies were down only 3 percent for academic year 2020-21 according to College House and are back to above pre-COVID levels for academic year 2021-22. The Fall 2021 freshman class is widely projected to be the largest in more than a decade. In our portfolio, we achieved the highest occupancy of all time in Fall 2021 with the super majority of our properties at 100 percent occupancy with waiting lists. Kids are tired of being at home. High school seniors spent their senior years studying online and desperately wanted to go away to college. Similarly, parents want their kids at school and not at home, irrespective of the method of course delivery.
What does student housing currently look like at the beginning of the new academic year? Which markets recorded the highest occupancy rates? Why?
Pierce: With Fall move-in having just been completed, occupancies in off-campus student housing are the highest in a very long time. The super majority of schools have returned to primarily in-person instruction and the kids are back at college. The freshman class is extra-large as most all college-bound high school seniors went off to school and the majority of the 9.5 percent decline in the Fall 2020 freshman class has matriculated to college this year.
The strongest markets are at the Power Five football conference universities where applications continue at all-time highs. Students perceive the fullest college experience at those types of universities. That has facilitated enrollment growth at most of those universities.
What can you tell us about investor sentiment across the country? Why is it a good idea to invest in student housing during these uncertain times?
Pierce: Investor interest is again peeking in student housing. It is an asset class that prospers during economic upcycles and even more so during recessions and down cycles. The pandemic proved the sector’s recession-resistant characteristics once again. The sector’s strong performance as compared to multi-family during the pandemic has also resulted in more capital gravitating to student housing as most investors really like “habitational” real estate and have realized that a smart real estate portfolio asset allocation strategy includes a meaningful allocation of the residential allocation going to student housing, where cap rates are measurably higher than in multifamily.
What are the biggest challenges in the student housing financing landscape?
Pierce: Until just recently, the agencies had imposed new “COVID-19 reserves” to their student housing loan underwriting criteria. This was resulting in +/- 10 percent of loan amounts being set aside for 18 months in COVID-19 reserves. This policy was implemented in summer 2020 when the fall university and student housing outlook was uncertain. Now that student housing occupancies, revenues and collections have proven very strong during the pandemic, the agencies have only recently rescinded those additional reserve requirements. In addition, banks and debt funds had stepped in to fill the agency voids, such that those sources are temporarily more cost-effective than agency loans. We don’t expect that to last, as we expect the agencies to start getting much more competitive with rates. The debt markets are now strong and plentiful for experienced student housing operators.
Despite the economic fallout, student housing development did not slow down since the onset of the pandemic. How do you expect the new supply to impact the sector in the short and long term?
Pierce: I do not agree that student housing development did not slow down during the pandemic, it did slow down. Projects that had procured financing commitments prior to the pandemic did largely proceed forward during the pandemic, but the volume of new construction did slow meaningfully in terms of new starts that had not procured financing pre-pandemic. For the foreseeable future, debt and equity is being much more selective in terms of development project markets and sponsorship. Seasoned student housing developers in strong markets will continue to receive financing for new construction, but others will not.
What risks and challenges are you concerned about when it comes to student housing?
Pierce: Student housing, like any other kind of commercial real estate, is not immune to over-development. What is key is to be at universities where enrollment demand remains very strong and where there are reasonable barriers to entry. During the decade of the 2000s, when national higher education enrollments increased by 38 percent, student housing prospered at most all universities.
Today, just like other sectors of commercial real estate, market/university selection is imperative. Our company seeks investments/developments at Power Five football conference universities, where enrollment demand continues at incredibly high levels. We also purse opportunities at the Group-of-Five football conference universities when located in major metro areas, where the underlying real estate market fundamentals strengthen the markets. Before you think our strategy is shaped by a football fan, do understand that Division I football participation is a conduit for high visibility and marketing and high demand for admission applications.
Fred Pierce is president and chief executive officer of Pierce Education Properties in San Diego.