Fred Pierce, founder and CEO of Pierce Education Properties.

SAN DIEGO—What are some untapped opportunities for student-housing investors? recently asked that question to Fred Pierce, founder and CEO of Pierce Education Properties. In addition, we learn about the fact that most reports peg total investment sales in this category to be in the $8-billion to $9-billion range. Check out the Q&A below for more on the subject. What is the sales-volume outlook for student housing in 2018?

Fred Pierce: 2017 ended up as another banner year in student housing.  Most reports peg total investment sales in the $8- to $9-billion range, which would make 2017 the second largest volume in industry history behind the $10-plus billion in 2016. There has been a paradigm shift in capital flows and investment sales in student housing since 2015. The norm in the decade between the mid-2000s and 2014 was $2 billion to $4 billion in annual investment sales. Since 2015, the totals have been $5.5 billion, $10 billion and now $8- to 9-billion in 2017. I forecast that for the foreseeable future annual investment sales will average in excess of $8 billion per year. What are the cap rates like now, and what is the outlook for the future?

Pierce: Cap rates are at all-time lows in student housing.  For more than a decade, student housing cap rates were largely in the 6s, but now are regularly in the 5s and the approximately $500 million ACC portfolio currently on the market is commanding a cap rate in the 4s. So long as the magnitude of core capital continues to flow into the space—which we expect it will—I would expect cap rates to remain steady in their current range despite rising interest rates. Although that may sound counter intuitive, it is being influenced more by supply and demand of capital and not as much by the relationship between interest rates and cap rates. How is the fundamental balance between supply and demand trending?

Pierce: Pre-leasing for our portfolio for AY 2018-19 is ahead of last year, an indicator the markets generally are stronger this year than last.  New supply has also slowed and forecasted deliveries in the low 40,000-bed range for fall 2018 would be the lowest since 2012. At the peak in 2013 and 2014, annual deliveries were in excess of 60,000 beds. We would still advise close scrutiny on the upper end of the market, as almost all new deliveries are at top of the market rents. What will be the most desirable types of student-housing properties in 2018, and how has this changed?

Pierce: Beauty is in the eyes of the beholder. Student housing product has now become more stratified than ever, which offers a little something for everybody. If you want to be immediately pedestrian to campus and are willing to pay top-of-the-market rent, there are new mid-rise projects to fit that bill. If the student is more price sensitive, but still wants their own bedroom and bathroom with best-in-class amenities, there are “drive” properties with dedicated shuttle service at really attractive rents. If the student wants to live in a house, cottage is what they choose. All of these represent good investment opportunities, but with somewhat different risk and return considerations. There are also ample opportunities for value-add investing. All of these types of student housing investment opportunities will continue to be available in 2018. What are some untapped opportunities for student-housing investors?

Pierce: The real opportunity is to allocate a portion of their portfolio to the niche sector of student housing which can produce out-sized returns, while also offering diversification benefits.  Student housing has proven to be a recession-resistant asset class and its performance is not highly correlated with the economy, nor multi-family. We are seeing more and more institutional investors deciding to construct their multi-family portfolio with a portion (10-20%) in student, a part (10-20%) in senior and the balance in conventional. I expect this trend of dedicated allocations to student housing to grow and diversifying in this manner will produce higher risk adjusted returns for an investor’s real estate portfolio.