Investment In Texas Student Housing Is Heating Up, Driven By New Entrants
Texas universities are promising a normal fall semester this year, and by all accounts, students are ready to return to campus. Some of the biggest colleges in the state are fully pre-leased, and others are well on their way to reaching pre-pandemic occupancy.
At a time traditional asset types like office continue to struggle, student housing is drawing the attention of a new wave of investors, who are eager to place their money in low-risk, high-yield assets.
“For every asset that we call for offers on, there's a new group showing up on bid day. I feel like every week, I'm fielding calls from either new foreign groups or family offices, or even institutions, who are looking [at] chasing yield,” JLL Director, Capital Markets Teddy Leatherman said.
The student housing sector had a challenging time in 2020. When regular campus life came to a halt last March, many students left college and headed home or elsewhere, enabled by a swift pivot to online classes. As uncertainty continued throughout the summer and into the fall, most universities opted to keep offering remote learning.
Off-campus student housing occupancy across the U.S. averaged 87% during the fall semester of 2020, down from 91.6% in fall 2019, according to RealPage data. The Texas market mirrored the national trend, with off-campus student occupancy averaging 85.2%, down from 91.6% during the same semester in 2019.
For some Texas universities, on-campus occupancy was significantly lower than the off-campus average. The University of Houston owns and manages seven housing facilities, and those properties averaged 43% occupancy during the fall 2020 semester, according to University of Houston data. That figure ticked up to 46% during the spring semester of 2021.
The University of Texas at Austin has 14 traditional residence halls and an apartment-style property on campus, as well as three other apartment communities to the west of the campus.
UT Austin Assistant Director for Residence Life for Housing and Dining Justin Jaskowiak said at the beginning of fall 2020, occupancy was just below 50% and ended up averaging 45.5% throughout the semester. Like the University of Houston, occupancy received a slight boost in the spring semester of 2021, rising to 48.7%.
“We tend to see a big range of performance between campuses in student housing even in normal years. But last year certainly exacerbated those differences,” RealPage Market Analytics Manager Carl Whitaker said.
The outlook for occupancy in the coming fall semester looks more promising. Whitaker said that right now, about 74% of all Texas student housing beds are leased for fall 2021, not far behind the 77% that had been leased by this point in 2019.
At Texas A&M, the university’s on-campus student housing facilities are “a little bit bursting at the seams” and 100% pre-leased for the fall 2021 semester, according to Texas A&M Director of Administrative & Support Services, Residence Life Carol Binzer. The same goes for UT Austin’s on-campus portfolio, which is receiving a much higher volume of inquiries than usual, according to Jaskowiak.
“I think there's a lot of excitement to return to campus, there's a lot of excitement to live in the residence halls, and there's a lot of desire to feel informed and safe,” Jaskowiak said.
Many colleges are returning to in-person classes in the fall, winding back the emphasis on remote learning that has dominated higher education over the past year. Institutions like Baylor University in Waco, Texas Tech University in Lubbock, University of Houston, UT Austin and Texas A&M have all indicated that the fall 2021 semester will be a return to normal operations, including 100% capacity.
Just as student housing occupancy fluctuated over the past 16 months, so did interest from the investment and capital markets side of the sector.
Newmark Vice Chairman Ryan Lang, the head of the firm’s student housing division, told Bisnow that when the coronavirus pandemic started, student housing was mired in uncertainty. Universities weren’t sure how to safely house students, and it was unclear if and when there would be in-person classes. That uncertainty quickly led to student housing projects being placed on hold.
“We saw on the capital market side, really things completely shut down at kind of, I'd say, end of March, April, last year,” Lang said.
Leatherman said that based on their pipeline, her team expected 2020 to be one of the largest transaction years in student housing history.
“And then Covid hit in March, and nearly every student housing transaction was put on pause for the next six months,” Leatherman said.
Debt markets dried up significantly, leaving few available options to finance deals — even those that were further along in the process and on their way to closing, according to Lang. From his perspective, the freeze lasted around four or five months, until toward the end of the third quarter, when students began to show up for the fall semester.
Leatherman noted that during that freeze period, her team was kept busy in equity placement, specifically for developments that would deliver in fall 2022, based on the assumption that by that time, the pandemic would be over.
“That was my first inkling that Covid was not going to affect student housing, capital markets for that long of a period,” Leatherman said.
Student housing falls under the umbrella of multifamily, which has displayed a strong performance across the country throughout the pandemic. Low capitalization rates are drawing investors from other sectors, attracted by higher yields and lower risk than other asset classes.
“When you look at student housing, you can buy the absolute best student housing asset, core-stabilized, at one of the best universities in the country. And that's still perhaps in the low [4%] cap range,” Lang said.
Investors began rotating out of office and retail into student housing in late 2020, and that trend has continued into 2021, according to Lang. Domestically, it’s capital groups, family offices and institutional groups looking to diversify where they put their funds, or keen to get equity out the door because so little was done last year.
In particular, schools participating within the five largest and wealthiest college athletics conferences — known as the Power Five — are receiving the most interest. In Texas, that interest is focused around UT Austin, Texas A&M and Texas Tech, according to Leatherman.
Because of Texas’ demographics and healthy growth outlook, there’s also interest in the Tier II and Tier III markets, which are less developed but expected to grow in the future. Leatherman said pricing has become so aggressive at the Tier I schools that investors are looking at the lower tiers to place capital, where they might be able to get more yield.
Investor interest in Texas student housing is evident when looking at the number of new projects. UT Austin has the largest number of off-campus student housing units under construction nationally, totaling 1,057, or the equivalent of 20% of its existing stock, according to Yardi Matrix’s Q2 2021 National Student Housing Report. Four other Texas universities also made the top 20 list for markets with the most units under construction.
Though Texas is performing better than many other states, the pandemic did delay deals, and the pipeline of student housing supply has tapered across the country. As an example, Lang pointed to Texas A&M, where there is only one new off-campus facility underway right now — a rare occurrence. That reduction in the pipeline is also driving investors to look at the sector.
“We're seeing it across the board right now. There is limited supplies throughout the country and throughout Texas,” Lang said.
Whitaker said that in a normal year, about 20% of all new student housing deliveries are in Texas. Development levels will fall in the short term, but Texas is still an attractive high-growth market for investors in the long run.
“It’s likely that overall development levels pull back further in fall 2022, although we still expect Texas-based universities to attract a large share of overall construction,” Whitaker said.