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Investors Head Back to School: Off-Campus Student Housing Demand Driving Leasing, Property Sales

Rising Enrollments, High Demand Helps Make New Development Pencil Out for REITs, Private Investors
August 31, 2016
Investors pumped more than $5 billion into student housing properties in the first half of 2016, and with Labor Day marking the start of what typically is the heaviest period for sales, 2016 could equal or exceed last year's record-setting sales volume in the growing niche property sector.

The late-summer leasing season for student housing is winding down as classes begin, with publicly traded REITs such as American Campus Communities and EdR reporting solid occupancies and robust leasing and rental rate increases at their properties in recent weeks.

Average asking rents for student housing have jumped from $742 per unit in the second quarter of 2015 to $835 in second-quarter 2016, according to CoStar data.

"At the midpoint of 2016 and as we enter the prime season for marketing student housing, volume is up as well, and a typically strong fourth quarter will allow [this year] to supplant 2015 as the largest year ever in terms of total student housing sales in the Midwest," said Ryan Tobias, a partner with Chicago-based Triad Real Estate Partners, in his firm's midyear market update. "The proliferation of new construction and larger developments hitting the market will cause volumes to remain high and yields to remain low."

Excluding properties targeted for disposition, ACC's core portfolio is 94.3% leased, 80 basis points above the prior year, said James Hopke, executive vice president and chief operating officer.

"After a record level of transaction volume in 2015 totaling over $5.6 billion, we’ve already seen over $5.3 billion in closed transactions for the first half of 2016. Investment in the sector continues to be driven by new and continued interest from foreign and domestic instructional investors and funds," said William Talbot, executive vice president and chief investment officer.

Sales volume this year includes two of the largest student housing portfolio trades on record. In March, privately owned Harrison Street Real Estate Capital closed on its $1.9 billion acquisition of Campus Crest Communities, adding more than 30,000 beds to its portfolio. And in late July, InvenTrust Properties Corp. finalized the $1.4 billion sale of its 6.34 million-square-foot University House Communities portfolio to Scion Student Communities LP, a joint venture between Singapore foreign capital investor GIC and the Canada Pension Plan Investment Board (CPPIB).

Forecasts generally call for continued growth in student housing. The National Center for Education Statistics forecasts national enrollments will grow an average of 1.4% yearly through 2023, with annual effective rent growth increasing more than 3% annually through 2021, trends that bode well for continued internal growth at Memphis-based EdR (NYSE: EDR), CEO Randy Churchey told investors.

While construction is expected to decline in 2017 from this year's levels overall, EdR, which owns or manages 79 communities with more than 41,000 beds serving 52 universities in 24 states, plans to ramp up inventory in its markets after three years of declining new supply, Churchey said.

EdR in recent days announced it has begun construction on an $80 million community at Northern Michigan University (NMU), developing more than 1,200 beds in several phases scheduled for delivery in the second half of 2017 and the fall of 2018.

"Even with more beds entering our markets, the rate of new supply is projected to exceed enrollment growth by only 40 basis points," Churchey said. "These results speak both of the quality of our newer portfolio communities as well as the modernization that continues to occur in the industry."

Private buyers such as investment firm CollegePlace Partners, Pierce Educational Properties and CA Ventures have also been very active. CollegePlace Partners, a value-add buyer, acquired The District, a 311-bed portfolio near Florida State University in Tallahassee in an off-market transaction valued at $22.7 million.

"Florida State has the capacity to house only 20% of its undergraduate enrollment of more than 41,000 students," CollegePlace Partners principal Beau Jaussi said. "The [property] also serves nearby Florida A&M which can house only 28% of its undergraduate students on campus."

The firm is expected to close on another three properties valued at roughly $100 million by the end of the year, Jaussi added.

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