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Student Housing: The New Safety Play for Major Real Estate Investors

Once a Niche, Campus Apartments Now Look Like A Good Bet
June 29, 2018
Twelve at U District, an American Campus Communities property at 4535 12th Ave NE in Seattle.

While the news that multifamily investor/operator Greystar and an affiliate of Blackstone planned to buy Education Realty Trust and its portfolio of off-campus student housing communities had been rumored for months, the $4.6 billion, all-cash deal announced this week confirms the former niche investment sector has gone mainstream.

One reason the big money is flowing into student housing this year is that investors increasingly see something that perhaps other apartment plays can’t deliver: safety.

For years, student housing has been a difficult investment niche in the multifamily sector, one that could throw off higher returns than traditional apartments, but also one that demanded more-intense management and administration. As a result, specialty investors have traditionally dominated the student housing sector.

But now with institutional money making big bets on student housing, investors appear to be willing to take on the additional management requirements in the belief that student housing - especially large properties located near the campuses of major public universities schools - will weather a future downturn better than other rental properties.

"Safety cannot be overlooked as a factor, student housing is generally a stable and recession-resilient asset," said Bob Faith, a founder and CEO of Greystar Partners. “The key is to construct a well-capitalized and well-located portfolio that is built to withstand the ebbs and flows of the market and choose universities that are competitive with growing enrollment."

The $4.6 billion deal to buy EdR and its more than 45,000 beds at 47 universities makes Greystar the second-largest student housing player in the country. The firm has long run its Greystar Student Living, its student housing arm.

In another major student housing deal this month, Austin’s Campus Advantage teamed with a state pension fund to acquire a six-property portfolio worth $200 million.

In many cases student housing properties are trading for a reported 4% cap rate or lower. While investment returns were once the primary appeal of student housing, now long-term players are looking at them as a place to park cash safely.

Greystar's Faith points out that student housing properties have consistently delivered steady returns in recent years, even during the Great recession. Enrollment at big state universities, such as the University of Texas’ campuses, University of Arizona, and elsewhere, has continued to grow, even as states have restricted funding and schools have cut back on dormitory construction.

Meanwhile the amenity-laden private properties built by developers have become more popular with students.

"We see a number of other factors impacting the outlook, including healthy demand forecasts driven by secular trends," said Faith, citing increased domestic enrollment and international student enrollment growth in the U.S.

Enrollment at universities, he reasons, will likely hold steady or increase. As developers increased the extras at new student housing developments, including rooftop pools, fancy gyms, common areas with pool tables and coffee bars, so have rents.

The overarching fear in the traditional multifamily sector is that a downturn in the economy could affect renters’ ability to pay the sky-high-rents at all the new downtown luxury properties being developed. If rents at those properties slip, owners could quickly be under water.

And while the same could be said for the ultra-expensive, amenity-laden student housing properties going up around campuses, Ryan Dennison, a senior vice president for capital markets at American Campus Communities, said student housing tends to have one critically important advnatage that is difficult to replace: location.

"For ACC, the number one amenity has always been location,” said Dennison. “Students want to be able to roll out of bed and walk to class.”

The key is having well-located properties very close to campus and classrooms carries a premium value by students for their convenience,(and by parents for their peace of mind, said Dennison.

“Whether you think of (student housing) as a safety net or not, every investor’s well-rounded portfolio now, is looking for something like this,” said Dennison. “We focus on large universities, enrollment-based plays of 30,000-40,000 students,” he added, saying student-renters are going to be there "through thick and thin."

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