A Letter from Joel & Patrick:
Over this past leasing cycle, unquestionably there has been some slower pre-leasing, fears of enrollment decline, issues created by the FAFSA delay and some exposure within properties and universities that owners are currently navigating. That said, after coming back from NMHC’s student housing conference this week, there were a lot of positive takeaways.
- Demand remains strong for this asset class.
- Fundamentals remain strong for this asset class.
- The bid/ask gap between buyers and sellers has narrowed.
- Interest rates have come down slightly with support that will continue over the next 12-18 months.
- New investors are consistently entering the student housing industry to diversify their portfolios.
- Owners are more inclined to sell assets now than they were in the past.
- Pricing remains relatively strong.
Deals are getting done. Last week we closed a 236-bed deal in Berkeley, California, and this week we are closing a 1,020-bed deal in Gainesville, Florida. 2025 will undoubtably provide clarity on the direction this industry is heading. In our opinion, rent growth will continue, development will progress, interest rates will continue trending downward and 2025’s total transaction volume will nearly double that of 2024. As always, if you are looking to buy, sell, refi/recap, develop, insure or just looking for intel, we are excited to be your partner.
Joel Dumes Patrick Mullowney
Senior Managing Director Campus Investment Properties
(513) 807-8650 (513)-490-2934
Pre-Lease Season Ends Slightly Below 2023 Rate
As of August, 92.8% of beds at the core 175 universities tracked by RealPage were leased for the fall 2024 semester1. Yardi reports a 92.9% pre-lease rate for August2. This means the pre-lease season ended slightly below the 2023 pre-lease rate of 94.4%, an all-time high. Despite this, the August pre-lease rate remains ahead of pre-pandemic numbers. There was a final leasing push at the end of the pre-lease cycle that narrowed the gap between last year’s rate and this year’s rate.
To reiterate last quarter’s report, this pre-lease rate decrease is not concerning. In fact, it was expected. The exceptionally high pre-lease and rent growth rates post-pandemic were not maintainable. The pre-lease rate was quickly approaching 100%, which is an unachievable number to expect the entire market to reach. This decrease in the rate over last year merely shows the market is stabilizing.
35 schools were at least 99% pre-leased by the end of August, including Ohio State, Oregon State, VCU, Auburn, and Illinois State2. RealPage reports 22 schools with essentially full occupancy, including University of Kansas, Ole Miss, Oklahoma State, James Madison University, Appalachian State, Coastal Carolina University, and Western Carolina University1. The Carolinas stood out as high performing states this pre-lease season.
Rent Growth is Steading
Annual effective rent growth was 3.6% in August1, and College House reports the national average rent per bed in September is $9703. UC Berkeley had the highest rent per bed of any market at $2,542. Like the declining pre-lease rate, the lower rent growth rate when compared to last year shows the market stabilizing post-pandemic. This was an expected decline. Owners looking to sell can take advantage of their rent rolls after two years of strong rent growth.
Six of RealPage’s tracked universities led the market in pre-lease and rent growth. All but one are in the South. These schools are Ole Miss (over 20% rent growth), University of Tennessee (over 20% rent growth), University of Kentucky (over 12% rent growth), Purdue (over 12% rent growth), College of Charleston (over 12% rent growth), and Coastal Carolina University (over 12% rent growth)1.
Recent Transactions
In the third quarter of 2024, 65 student housing properties were transacted. Purdue saw the most units trade hands (three properties totaling 384 units and 909 beds), followed by the University of North Carolina at Charlotte (one property with 332 units and 887 beds), Boston University (one property with 319 units and 503 beds), Mizzou (one property with 318 units and 972 beds), and Texas State University (one property with 316 units and 512 beds)4. Michigan State University had the most transactions (14 properties totaling 97 units and 97 beds)4.
College Enrollment is Rebounding
College enrollment is beginning to rebound after declining in 2022. In 2022, enrollment decreased 0.2%. In 2023, enrollment increased 0.6%5. For the fall 2024 school year, total enrollment increased 2.5% (this is still a preliminary estimate)6. With the FAFSA rollout delay, an enrollment decrease was expected, so this increase was a nice surprise for investors. In fact, enrollment growth is outpacing deliveries. Yardi predicts 41,432 beds will be delivered at Yardi 200 schools this year. Investors can also expect to see slight recovery from the late FAFSA rollout in the spring enrollment numbers. This was just a blip in the radar.
A few schools with exceptionally strong enrollment growth, according to Forbes, are Oklahoma State (Stillwater and Tulsa locations), University of Tennessee, University of Houston, Mizzou, Coastal Carolina University, and High Point6. Two-year colleges, which were hit the hardest by the pandemic, also saw enrollment increases.
Finishing the Year Strong
As we move into the final quarter of 2024, the student housing environment is strong and promising. A few weeks ago, the Fed cut rates by half a point, and more cuts are expected in the fourth quarter of 2024. Investors could find a window of opportunity in the fourth quarter where the math makes sense. The two Fed rate decisions in the fourth quarter will be on November 7th and December 18th. There continue to be a lot of new entrants to the sector, many traditional multifamily investors that see student housing’s continued strong performance. Student housing has a higher yield and stronger fundamentals than multifamily. These investors will contribute to a higher number of transactions post-rate cut. The bid-ask gap is also starting to narrow. Our team is looking forward to finishing this year strong.
[1] RealPage: Student Housing Pre-Lease Season Ends Below Year-Ago Record
[2] Multi-Housing News: National Student Housing Report – September 2024
[3] Student Housing Business: The State of Student Housing Webinar
[4] Primary Data from CoStar
[5] RealPage: After Slumping in 2022, University Enrollment Rebounds
[6] Forbes: Despite Headwinds, Several Colleges Report Record Fall Enrollments