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Bay Area Student Housing Demand Is High, But So Are Construction Costs

Even with the region’s many challenges, the demand for student housing in the San Francisco Bay Area continues to grow, offering opportunity for developers in the space, but construction costs, land values and labor shortages are persistent problems.

Suffolk Construction's Karri Novak, McCarthy Building Cos.' Alice Nguyen, San Francisco State University's Hamid Ghaemmaghami, Studio KDA's Charles Kahn, Valiance Capital's Nhan Nguyen Le and American Campus Communities' James Wilhelm

“The tailwinds for the student housing sector are excellent,” American Campus Communities Executive Vice President James Wilhelm said. “However, if you say what keeps you up at night, quite honestly, it’s just core feasibility. How do you balance rental rates, construction costs, cost capital and operating expenses?”

Wilhelm was speaking as part of a panel at Bisnow’s Northern California Student Housing & Higher Education Summit at the Hibernia SF on May 24.

Financing poses a challenge, with lenders growing risk-averse due to three large bank failures and increasing concerns over commercial real estate debt. There is a general feeling that financial institutions are pressing pause on loaning money for developments of all stripes. 

“When we’re looking at this situation, one of our key regional banks have put pencils down on projects at least for the next few months,” Valiance Capital Managing Principal and founder Nhan Nguyen Le said.

There are ways to work around financing problems, according to Hamid Ghaemmaghami, executive director of real estate for San Francisco State University, but they often rely on special circumstances or government help.

“We just got a grant from the state for $160M,” he said. “So a project pencils out because the grant doesn’t need to be paid back.”

The state is also helping finance student housing projects and providing zero-interest loans, while private companies such as Apple are working on housing issues in the Bay Area, Ghaemmaghami said.

Part of the reason the state is providing funding is SB 886. The law, signed in 2022, provided $1.5B in funding for student housing projects, while encouraging universities to develop plans to increase housing by 20% by 2030 and providing student housing projects exemptions to environmental laws.

According to a 2017 UC Berkeley study, about 10% of students in the state’s university system experienced homelessness. UC Berkeley provides on-campus housing to only 22% of its student body, the lowest in the UC system. Approximately 28% of San Francisco State University students live on-campus, with the remaining left to find off-campus housing in an area with one of the highest rents in the country. 

UC campuses have added about 21,000 beds since 2015, while enrollment has grown by 43,000, according to the state Legislative Analyst Office. In 2021, an Alameda County Superior Court judge ruled UC Berkeley would have to freeze enrollment at 2020-2021 levels until more housing was created. The California Supreme Court upheld the decision this year. 

“We are reading these stories about kids who are showing up to look at apartments and there’s 50 or 60 kids in line in front of them ready to rent the apartment,” Suffolk Construction Vice President Karri Novak said. 

For student housing developers, this environment means that despite macroeconomic headwinds, there is enormous demand for new student housing projects near UC Berkeley and other related higher education institutions in the Bay Area. 

Universities are trying to help, agreeing to contribute capital to housing developments in an era of high interest rates and construction costs, Wilhelm said. 

“All of a sudden a project that maybe was going to cost $150M that student rents are going to be supporting is closer to $100M in total costs,” he said. This helps keep student rents reasonable for developers looking to get returns on their investment. 

The entitlement process to build on campus is more streamlined, Wilhelm said, and developers don’t have to combat the typical inflated land values found in the Bay Area.

“On-campus development is unique in that the university provides you with a site and it can subsidize the development by not having high ground rent,” he said. “The second thing is, you’re not working with the city or the county but with the university, so you have an advantage in speed to market.”

For instance, American Campus Communities is the development partner for the Albany Village Graduate Student Apartments, a 761-bed development being constructed on land owned by UC Berkeley. 

“If that project was the off-campus approach, where you had to go buy the land, we would not have been able to achieve feasibility, let alone affordability,” Wilhelm said. 

While the office sector continues to suffer mightily in the Bay Area, student housing projects provide a ray of hope that if the banking industry can steady itself, developers can get to work. 

“The student housing shortage is still a very big problem that is not going to go away anytime soon,” Nguyen Le said. “So for those who can solve this problem, I think those are the ones that can capture opportunities.”