Student Housing’s Best, Worst Markets

Real estate investors have increasingly focused on the student housing industry in search of more yield. Interest has been so intense, in fact, that questions have arisen about whether the industry is starting to overheat.

The sector runs the gamut from privately owned and managed off-campus housing to on-campus housing in some form of public–private partnership to university-owned and -managed dormitories. Additionally, from a market perspective, the sector competes with both conventional apartments in proximity to a university as well as the “shadow market,” the single-family rentals or “student slums” close to a university.

One of the reasons for heightened investor interest is the wave of Echo Boomers, or Gen Y, the largest generation in our nation’s history, which is expected to increase college enrollments—and, thus, bed demand­—by at least 10 percent by 2016.

As with the conventional apartment market, oversupply is a major concern in the student housing sector, especially as developers rush to fill the perceived needs. However, unlike the conventional market, a single student housing project can move a market into an oversupply situation, so the need for foresight is especially important.

Currently, Axiometrics is tracking privately owned student housing properties at 240 universities, ranging from tier-one flagship schools to tier-two and tier-three schools. Of these, there is active construction at 111 universities, representing approximately 112,000 beds.

The following table of 12 universities displays the April results for a sample of those universities with the largest off-campus bed counts. Axiometrics is tracking 7,000 to 21,000 existing beds at these universities.

This group of schools had a combined 14,516 beds in the initial pre-lease stage for this fall. While the University of Texas is set to deliver the most beds of this group, the new stock does not appear to be detriment to that market’s existing assets. On a same-store basis, the existing assets had a better pre-lease this past April (67 percent) than the same month a year ago (62 percent). Those assets have also increased effective rents 3.9 percent over the same period despite the new competition.

The conventional apartment market also has some bearing on what’s happening in the student market, and vice versa. Austin, Texas, has been one of the hottest conventional apartment markets for the past three years, which has also benefited the student sector. For conventional apartment properties, the average level of effective rent has increased almost 24 percent in Austin since the trough in the market a little over three years ago. In the April numbers, effective rents were up 4.2 percent from the prior year with an occupancy rate of 95.1 percent. Class C properties, which compete for students looking for a more affordable housing option, had the strongest performance, with annual effective rent growth at 7.8 percent and an occupancy rate of 95.6 percent.

Athens, Ga., the home of the University of Georgia, is on the other end of the spectrum. The conventional properties in Athens only pushed rents 0.1 percent compared with last April, and the average occupancy rate was 92 percent, both of which rank among the lowest in the country. Over the same period, student properties lowered effective rents by 0.5 percent to maintain a similar pre-lease trend as a year ago. This April’s pre-lease average for student properties was 1 percent below last April’s rate.

While the University of Georgia’s 2013 fall pipeline count is much lower than several other universities on the list, the school jumps off the page with the largest disparity between the performance of its new properties and that of its existing stock. The two new properties at the university have an average rent that’s 67 percent higher per bed than does the existing stock. The properties were only 15 percent pre-leased as of April, but the rate improved to 20 percent in May after some incentives were offered. Concessions of up to a month free were being offered on select floor plans at the new properties, which lowered the average effective price to $677 per bed in this market. These properties were started late but are still expecting to deliver in time for fall.

Along with the premium pricing, the delivery timing could be another factor contributing to the low pre-leasing rates relative to the existing stock. Leasing velocity is expected to improve as the properties get closer to completion and market confidence in their real availability increases.

Jay Denton is vice president of research at Dallas-based market research firm Axiometrics.