Investors - NOVEMBER 8, 2019

Undergraduate enrollment continues to decline; should student-housing developers be worried?

by Andrea Zander

The United States is the world’s largest student-housing market, attracting the highest volume of investment capital each year. Annual student housing investment volume has more than tripled since 2014, reaching $11 billion last year, reported CBRE. And the prices for U.S. student housing investments have never been higher, reported Real Capital Analytics in June 2019.

In addition, firms such as Blackstone are entering the student housing sector. Blackstone recently spent $1.2 billion to acquire 20 student developments adjacent to schools including the University of California Riverside, Pennsylvania State University and Arizona State University. Also, British company Scape has plans to invest $1 billion in private off-campus housing for 2,000 students in Boston, with a goal of expanding to 20,000. And big player in the space American Campus Communities has plans to add 22,500 beds by the fall of 2020, which is a decrease of 20 percent in new supply compared to 2019 and the lowest amount of supply since 2011, according to its 2019 earnings call in September.

With investors’ interest, student housing is in a construction boom. Luxury housing for students has become a multibillion-dollar industry. Not only is there a growing interest for investors’ portfolios, students want to live in these properties. In fall 2018, the vacancy rate in student housing units was 2.6 percent, and it was forecast to fall to 2.3 percent in fall 2019. In order to accommodate the demand, the inventory growth of student housing units is expected to reach 2.5 percent in 2019, up from 1.4 percent in the previous year.

Thus far, developers opened 47,000 new student-housing beds across the United States in time for the fall 2019 school year according to a new report from the National Real Estate Investor. But the occupancy rate at the start of the 2019-year averaged 93.2 percent, which is about 10 basis points below a year ago.

Are developers and universities overestimating the demand?

The empty beds could be due to the fact that overall undergraduate enrollment in America’s colleges and universities has fallen for eight consecutive years, according to current term enrollment estimations, which are published every December and May by the National Student Clearinghouse Research Center. In fall 2017, there were 16.8 million students enrolled in undergraduate programs, a 7 percent decrease from the total enrollment of 18.1 million in 2010.

In addition, the loss of students may cause CMBS loans issued in 2010 or later to become problematic, reported Trepp. There is approximately $4.5 billion in private-label CMBS student housing debt across 250 loans that are currently outstanding, which represents more than 11 percent of the total multifamily balance. As of August, approximately $331 million in student housing loans were delinquent.

“The student housing delinquency rate of 7.36 percent is far above the post-crisis level for any major [commercial] property category, including the much-scrutinized retail sector, which has attracted much of the industry’s concern,” said Manus Clancy & Catherine Liu, authors of the Trepp report.

In all, $1.53 billion worth of student housing loans were made on properties constructed in 2010 or later. Some of those communities are now in trouble as they are having trouble maintaining occupancy levels and strong rents as they face new competition from these new luxury units.

“The housing options that find it hardest to compete are those complexes that were amenity-rich 10 years ago and remain pricey, but now seem dated,” Clancy and Liu wrote.

The decline in college enrollment can be attributed to a variety factors, including cost: The annual cost of attending a four-year private institution in the United States reached $48,510 last year, more than double what it was less than two decades ago. And the average student debt has climbed from about $11,000 in 1990 to around $35,000 in 2018. A U.S. Department of Housing and Urban Development report found “housing costs [are] likely a significant portion” of individual student debt. The cost of housing at public universities has nearly doubled since the 1980s, according to the College Board.

But not all colleges and universities are reporting a drop in applicants. Schools in tighter, high competition markets will have continued demand. Student housing linked to universities with elite football programs attract the best pricing and greatest demand from investors, drawn by the large and consistent enrollments, as well as the stable cash flows that these properties offer, according to an analysis from CBRE. Smaller universities without the football stadium brand, and located in secondary markets, such as the Midwest, may feel the downturn in the student housing market.

But “cheaper” tuition schools are seeing their enrollment increase (see Universities see influx of enrollment applications).

Despite the heavy cost for students, clearly, investors and institutional builders believe the sector will still see high demand.

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