Student housing sales volumes have already hit $1.2 billion for the year, meaning the market is on track to reach between $8 billion and $10 billion in student housing sales this year. Student housing investment sales have been steadily increasing since 2015, creating a new industry normal that is likely to keep pace through 2019.
“Through mid-March, RCA had reported $1.2 billion in student housing investment sales in 2019, but that is not yet a full quarter and there is always a lag in reporting commercial real estate sales, so the Q1 totals will most assuredly be higher than that,” Frederick W. Pierce, IV, president and CEO, at Pierce Education Properties, tells GlobeSt.com. “As the first quarter has historically represented 22% of annual volume, sales thus far support the continuation in 2019 of the “new industry norm” of $6 billion or more of annual student housing investment sales that has been eclipsed every year since 2015. Depending on how many portfolio transactions occur, the investment sales volume could again reach the $8 billion to $10 billion range.”
In the same time that sales volumes have increased, cap rates have also compressed by 5%, bottoming at an average of 5.8% at the end of last year, according to RCA. “This timeframe generally reflects top of cycle valuations in commercial real estate, in general, combined with a generally rising interest rate environment,” says Pierce. “As such, albeit the cap rate compression during the last three years has been mild, it still reflects very strong valuations and is not inconsistent with what has occurred with multi-family valuations during that period.”
As Pierce noted, the number of portfolio sales will have an impact on sales volumes this year. There is appetite from both private and institutional capital for student housing product, particularly at scale. “The most intriguing transaction in the space over the last six months is no doubt the privatization of EdR by Greystar,” he says. “This demonstrates the nimbleness and appetite of private buyers and institutional capital to respond to opportunities when identified and transact with scale. It also demonstrates that ongoing mark-to-market pricing in public capital markets focused on quarterly earnings can sometimes materially under-value public companies.”
However, in the last six months, there has been a decrease in student housing portfolio sales. According to Pierce, this is particularly odd given the premium pricing for this product. “This likely reflects an increasing scarcity of highly sought after homogeneous portfolios and the fact that several of the large merchant builders in student housing are opting to recapitalize and hold, rather than dispose of, their newly completed properties,” he says. “That being said, given the value premium attributed to portfolio sales, I do expect the trend to continue into the future of portfolios representing a meaningful percentage of annual investment sales in the student housing space.”