Student housing development will likely slow in 2019. For the first time this cycle, development activity is expected to fall below 40,000 beds nationally, following what has been a very active development niche this cycle. The slow down, however, could be a sign of a restrained market, responding to demand needs and ample deliveries last year.
“Development activity peaked in 2013 and 2014 when 59,000 and 62,000 beds respectively were delivered to the market,” Frederick W. Pierce, IV, president and CEO of Pierce Education Properties, tells GlobeSt.com. “The pace of new construction slowed to about 40,000 beds completed in fall 2018 and deliveries in 2019 are forecasted below 40,000 beds for the first time since the end of the Great Recession in 2011. A more moderated volume of new deliveries is welcome, as student housing is not immune to over-building, despite strong demographics.”
Since 2010, student housing development has been robust. “There has been very robust development activity in student housing,” explains Pierce. “Since 2010, supply of purpose-built beds in the AXIO 175 markets has increased 68% from about 450,000 in 2010 to just over 750,000 beds in 2017.”
This cycle, new student housing product has been built in mid- and high-rise buildings with increasing rents. “Nearly all of the new construction in student housing in this decade has been comprised of mid- and high-rise buildings in pedestrian locations at top of market rents often reaching $1,000 per bed and higher,” explains Pierce. “There remains a significant inventory of purpose-built student properties, largely built in the 2000s, that are highly amenitized and very popular among students, but typically charging rents at half the rates of new construction. This has had the effect of broadening the appeal and affordability of purpose-built student housing to a wider array of students and substantially increasing the size of the market.”
Capital investment has also increased this cycle, with more institutional owners getting into the student housing niche—thanks to the development activity and rising rents. Pierce says that student housing “has become a recognized and legitimate institutional asset class, along with selected other niche sectors of commercial real estate.” According to PREA’s Investor Intentions survey, 14% of institutional investors intended to invest in student housing in 2018, he adds. The list of reasons why institutional capital is attracted to student housing is long. Pierce says, “[student housing] has delivered higher risk-adjusted returns as compared to multi-family investment; investment sales, ranging from $8 to $10 billion annually in recent years, have been sufficient to support significant equity allocations to the space; and offers portfolio diversification benefits including its recession-resistant nature and low correlation with other real estate asset classes,” says Pierce. “Public REITs in the space have also offered more data, research and transparency in the sector.”