Student housing not immune to pandemic, hit hard
Most commercial real estate property types have been negatively impacted during COVID-19 and student housing is no exception. Student housing properties across the US are facing operational challenges and uncertainty surrounding the ability to adjust operations and product to near-term issues related to the pandemic (increased rent abatement, lower occupancy, less density in unit mix, and increased expenses related to cleaning). Along with these immediate challenges, the decision by many universities to shift curricula to fully or partially virtual classrooms has increased the uncertainty that student housing properties will be able to capture continued positive rent growth going forward.
Student housing market activity has lagged multifamily in 2020 (see the table above). The number of completed transactions (“count”) trailed multifamily count the most (6%) and was down 33% in the first half of 2020 when compared with the same period in 2019.
Varied responses from universities raises new risks
School responses to the pandemic have varied in terms of shifting classes to online formats. While many universities (37%) have shifted the Fall 2020 curriculum online, nearly two thirds still have some degree of interaction in person (see the table below). Proximity to dense population centers and rankings of the university appear to be correlated with the decision to go virtual – even if these were not causal factors in the decision. Despite this large shift to virtual learning, leasing at off-campus student housing properties appears to be holding up quite well given that so many students are not necessarily required to be physically present to attend class. The leasing activity seen so far gives credence to the college and university experience being more than strictly educational. Occupancy has declined by 5-15% across most student housing properties, but vary greatly by market and property.
The wide-ranging and rapid adoption of virtual learning by many schools has raised uncertainty for student housing. Even if virtual learning is not implemented by all schools, its long-term presence may have negative demand implications for student housing. This is a new risk that many investors and lenders are considering for all student housing (see the table below). The measures taken to adjust schedules this fall are temporary, so there are no clear differences that can be attributed to these temporary plans in regards to market activity levels (i.e., transaction count, dollar volume, or deal size); however, it does appear clear that the perceived increased risk of a shift to virtual has contributed to an overall decline in market activity when compared to all other multifamily.
Pandemic silver lining, but long-term challenges ahead
Many on-campus housing options have proven to be either too dense or outdated and in need of modernization and updating – which could be a silver lining for off-campus student housing properties, as supply will be restricted and support local rent growth in the near term. However, the outlook for student housing is not favorable and will likely be driven by declining demand. The shift to more virtual learning will be one of the drivers behind this, but another major driver will be the replacement of the larger Millennial generation with the smaller Generation Z student body – a shift that was already underway, but still significant – as well as the continued debate over the price and economics of the educational experience.
Weaker demand will translate into declining operating metrics and lower valuations. In terms of pricing, student housing outpaced all other multifamily for years, but has generally followed the same direction as multifamily (see the graph below). While student housing has diverged from multifamily rapidly over the last three years, it will likely narrow this gap and converge in the coming years.