Student management

Growing demand leads to lower student housing cap rates

Student accommodation has emerged stronger than ever from the COVID-19 pandemic, leading to increased interest from property investors, including some who had not previously targeted the sector.

With many colleges now fully back to in-person classes and the US economy on solid footing (despite some headwinds from inflationary pressures and global uncertainty), student housing sales volume is now higher than it was not before the start of the pandemic. As a result, 2021 ended up being the biggest year for student housing sales in the past decade.

Prices for purpose-built student accommodation are now higher on average than they have ever been, relative to property incomes. And they are likely to rise even further, pushing cap rates even lower.

But there remains a major selling point: student accommodation trades at a discount to conventional multi-family properties.

“Although cap rates for these assets are at historically low levels, they are still trading 50 to 100 basis points above cap rates for conventional multifamily assets,” said Frederick Pierce, president and chief executive officer of management of San Diego-based Pierce Educational Properties. .

Investors spent more on buying student housing — a total of $5.8 billion — in the fourth quarter of 2021 than any other quarter in the past decade, according to New York-based Real Capital Analytics (RCA). That’s more than the $4.4 billion they spent in the fourth quarter of 2020, when relief from student housing’s strong performance during the pandemic sparked a flood of pent-up demand. It’s also more than the $5.5 billion spent by investors in the third quarter of 2018, the busiest quarter of the pre-pandemic student housing investment boom.

“The volume of transactions was astonishing by any measure,” says Jaclyn Fitts, executive vice president and co-lead of the national student housing team for CBRE, working out of the company’s Dallas offices.


The prices these investors pay for student accommodation continue to rise relative to the income generated by the properties. These price increases have been driving down average returns on student housing investments for several years.

“Cap rates had already fallen dramatically,” says Fitts.

Average cap rates fell to 5.1% in the fourth quarter of 2021, from 5.4% the previous year and 5.6% in the fourth quarter of 2019, according to RCA.

But student housing cap rates are expected to fall further, with prices rising even further in the coming year. Indeed, average apartment cap rates have already moved ahead in 2021, dropping even further than student housing cap rates. According to RCA, apartment cap rates averaged 3.9% in the fourth quarter of 2021, down from the median range of 4% the previous year.
“Student housing cap rates fell in the fourth quarter — multi-family housing cap rates fell again overall,” Fitts says.

New investors continue to invest in student housing due to these relatively high returns.

“We regularly see traditionally conventional buyers ‘switch’ to student apartments for a comparatively higher yield,” says Pierce. “The walkable assets of ‘Power Five’ football conference colleges are regularly seen as a viable alternative to conventional multi-family properties.”

Prices continue to fall in the bidding wars for student accommodation. Sellers also consider the reputation of potential buyers and the likelihood of a sale closing quickly.

“The perceived certainty of execution is always highly valued by sellers, along with the buyer’s reputation that they don’t ‘re-negotiate’ the price of their acquisitions,” says Pierce.

Investors find higher returns beyond major state universities

Major institutional investors continue to offer huge sums of money to quickly purchase new Class A student accommodation located within walking distance of major Power Five universities. But small investors continue to use their knowledge of local markets to buy properties near small schools at higher cap rates.

“In general, properties in smaller universities and secondary or tertiary markets are often the most attractive to regional investors who already own apartments in the local market,” says Pierce. “Some domestic buyers are also attracted to the assets of these types of universities because of their relatively higher yields and cap rates.”

These properties in smaller student housing markets typically sell for cap rates 100 to 200 basis points higher than properties near larger public schools, Pierce says.

Investors may also find opportunities to add value to older properties located more than half a mile from universities.

“This is our biggest opportunity,” Fitts says. “Non-pedestrian products offer an affordable price…there is always a demand for it.”