Student Housing Developers Are Running Out Of Viable Markets

Without the backing of billion-dollar funds, developing student housing is like threading a needle right now — and developers are running out of needles.

The flood of institutional capital into the sector has flowed primarily toward universities in Power 5 athletic conferences, and longtime student housing developers like The Michaels Organization and Campus Apartments have been priced out, executives from both companies said at Bisnow’s Higher Education and University Development Summit on July 25.

On the flip side, hundreds of small colleges are at risk of going under in the next few years due to declining enrollment, further narrowing the band of appealing markets in which to operate, panelists said onstage at the DoubleTree by Hilton on South Broad Street in Philadelphia.

“There are schools out there struggling with funding and resources, and there are schools like [the University of Pennsylvania] and other Power 5 schools that are struggling with affordability,” Campus Apartments Executive Vice President and Chief Operating Officer Miles Orth said.

Because student housing proved so resilient during the pandemic, institutionally backed or publicly owned developers are treating it as a safe bet in the Sun Belt, Michaels Executive Vice President of Development Michael Flanagan said.

“At the University of Tennessee, Knoxville, there’s 3,500 beds coming,” Orth said. “Florida State [University], [The University of] Florida — all the markets you’d expect. We’re a little worried about the overbuilding happening in those markets.”

To avoid that level of competition, Michaels has been searching for new markets to enter by looking for schools with enrollment growth, but without fitting the obvious demographic trends.

“Where it’s outside of the major metros and top markets, it’s very much school-dependent,” Flanagan said.

The degree to which construction has increased in price over the past three years has threatened the viability of public-private partnerships, for years a darling of discussions at student housing events, Flanagan and Orth said.

“We’re working with the university as a sponsor in a P3[-type] structure for development, and it becomes a battle between what the university would ideally like to have and the affordability question,” Flanagan said. “There quite often has to be a hatchet taken to the ideal plans just so you can deliver something.

“In the last 12 months or so, some of the conversations have been, ‘Maybe we need to put this on the shelf for 12 months or so and then figure this out.’”

Some schools’ revenue streams are no longer sufficient to fund the capital projects they envisioned even a couple of years ago, while others fight to keep housing costs down for students, Flanagan and Orth said.

The University of Pennsylvania is holding firm on affordability at a redevelopment project for its graduate students under construction right now, Penn Real Estate Executive Director Ed Datz said.

“Five or ten years ago in P3s, the developer could come back and say, ‘Oh, sorry, we can’t afford to build it at that rate, we have to charge [students] 5% higher rates,’” Datz said. 

Despite the overall health of student housing as an asset class, much of higher education is on a similar trajectory to the office market: slumping demand driving a flight to quality. For higher education, dropping enrollment can be a vicious cycle driving prospective students to larger, more stable-seeming campuses.

“There’s been a crisis looming for a long time, and now we’re seeing it,” Saxbys CEO Nick Bayer said at the event. “We’re seeing more campuses closing, so when we look at sustainability, [it’s] from the perspective of universities sustaining their own operations.”

Perhaps the ideal spots for legacy developers are the areas around schools between 10,000 and 15,000 students. A campus with more than 15,000 students can become a magnet for the players with the deepest pockets, while one with fewer than 10,000 students isn’t eligible for financing from agencies Fannie Mae and Freddie Mac, Orth said.

“There are disincentives” for developing around smaller schools, Orth said. With the sweet spot shrinking to this degree, Campus Apartments would only start a development right now if it was approached by a school for a P3.

“We have shifted from development to acquisition, but again in those larger markets, there continues to be a lot of money chasing those deals,” Orth said. “It’s difficult to compete, and in many instances, we’re not competitive.”