No Signs of Slowdown for the Student Housing Boom

The past few years have proven resilient for student housing, with the sector remaining strong. 2024 has shown continued momentum, with significant amounts of capital targeting student housing. We spoke with Jack Palms, VP of Acquisitions at RREAF Holdings, on why student housing stands out and what the future holds for the sector.

Q: With a notable surge in investor interest, what factors do you believe are driving this enthusiasm for the student housing market right now?

A: Investors have always had a strong interest in multifamily properties, which is, in essence, what student housing imitates. However, unlike multifamily properties, student housing offers owners and investors an additional line of security. Most students will have to provide a cosigner (typically a parent or guardian), which gives student housing assets a higher collection rate. Additionally, year-over-year student housing has continued to have historical performance both in terms of rent growth and occupancy. The number of college applicants to four-year colleges has increased by more than 28% since March 2024 compared to 2019-2020.

Q: How does the investment landscape in student housing differ from other real estate sectors, and what advantages does it offer to investors? What specific attributes or metrics are investors prioritizing when evaluating opportunities in student housing?

A: Student housing allows owners/developers to “lock in” leases for an entire year and not have the physical occupancy volatility of traditional multifamily. Student housing typically has an additional layer of credit through parental guarantees.

Student housing investors will investigate metrics such as school infrastructure, enrollment, enrollment projections, new school initiatives, proximity to campus, campus development activity, and school conferences. At RREAF, we are focused on acquiring student housing assets located near Power 5 Schools and Tier 1 Research Institutions, where there is an imbalance of supply and demand, strong enrollment growth, and assets that have a plethora of amenities.

Q: How does risk assessment differ in student housing compared to more traditional real estate investments?

A: Simply put, your tenants are students in college, which comes with different levels of credit, insurance, and asset damage risk. Additionally, you have one lease up for each new school year, which can benefit the investment greatly but can also be detrimental if a lease up isn’t successful. This can come in the impacts of occupancy or rent growth, and these risks are always weighed into the “risk-adjusted returns” for the asset type, whether that is a core, value-add, or development deal.

Q: What are the key drivers that make student housing a resilient investment option, especially in today’s challenging economic climate?

A: In previous challenging economic climates, we saw an increase in higher education as this tends to correlate with a tougher labor market; thus, students seek out educational opportunities at large Tier 1 institutions, which results in an increased need for housing. For example, enrollment at public institutions rose by 11.5% from 2008 to 2012, and the recessions of 1990 and 2001 followed a similar pattern. This makes student housing somewhat predictable in that preleasing and lease terms provide a predictable revenue stream for owners and investors and reduce the risk of vacancies.

Q: What factors could influence growth over the next 5-10 years? Looking ahead, how do you see the future of student housing continuing to evolve?

A: As universities and colleges change their pandemic-instated guidance on applications to either pre-pandemic or hybrid versions, this could potentially affect enrollment growth at universities. The changes to the ACT, SAT, and other standardized testing could also impact high schoolers’ decisions when considering higher education.

With new technology replacing several jobs, there might be a shift in people wanting/needing to attend school to enter the workforce. Students will continue to seek out the large tier 1 institutions, prioritize assets near the campus, and provide notable amenities such as pools, work pods, workout areas, pickleball courts, lounging rooms, and game rooms. Health and wellness prioritization is in full force, including students, and those initiatives will drive students to their respective assets in the market.

Q: The South is experiencing a notable boom in the student housing sector. What factors contribute to growth in the region?

A: The influx of positive net migration to southern states since 2020 has dramatically increased as many seek business-friendly environments, warmer climates, and ease of living provided by Southern states. Combined with that, more than 69% of all undergraduates attend a college within 50 miles of their permanent home address. The academic strength and reputation of many southern private and public universities draw in a higher interest.

Q: Why do you think the Student housing market holds particular allure for investors compared to other niche real estate sectors?

A: 46 million people will reach college age in the next 10 years, creating continued demand for student housing. Secondly, cap rates are in line with traditional multifamily investments. Overall, the sector has strong fundamentals, with student housing experiencing historical performance over the last five years. It has garnered itself as an institutional asset class, which has brought institutional liquidity to the market. Student housing has continued to outperform other asset classes, but most importantly, it was one of the best-performing asset classes after the pandemic