Student management

Rising interest rates shake up student housing offers

More students than ever before are signing leases to live in student accommodation as the student housing industry has completely outgrown all the disruption caused by the pandemic. But investors, including buyers and sellers, are reluctant to make deals. Rising interest rates and the cost of debt are clouding the financial projections of potential buyers, reducing the amount they are willing to pay for student accommodation. But most sellers are not yet willing to cut their prices, resulting in slower business activity.

Rising rents could help make up some of the difference. And at least some buyers and sellers are already starting to negotiate more seriously on very strong pre-lease data, according to market watchers.

“A lot of investor groups have been on hiatus. We’re seeing groups resume their hiatus faster than expected,” says Jaclyn Fitts, executive vice president and co-lead of CBRE’s national student housing team. groups that told me a month ago that they were on the sidelines are already coming back.”

The summer months have always been slow for student housing negotiators, as buyers and sellers wait to see how many student housing beds are rented in time for the start of the academic year. Rising interest rates have made this downturn downright chilling, according to traders like Fitts.

Interest rates are on the rise

Investors in student accommodation now have to accept much higher interest rates when taking out a fixed rate permanent loan.

Typical interest rates for permanent student housing loans were around 5.25% last week in July 2022, before the Fed raised rates another 75 basis points this week. “At this time last year, we are underwriting interest rates of around 3.65%,” says Jamie Swick, senior partner of the National Student Housing Group at Colliers International.

Higher interest rates have a huge effect on how much of a loan student accommodation can sustain and how much an investor can afford to pay.

Sellers did not immediately adjust their expectations. “Sellers continue to push for prices that would likely result in negative leveraged returns for buyers — these types of deals work for very little of the equity in our space,” Swick says.

Capitalization rates are likely to increase over time. But they generally don’t rise (or fall) at the same time as long-term interest rates. “I don’t believe it’s directly correlated,” Fitts says.

Average 12-month cap rates for student housing sales were still below 5% in May 2022, near the lowest cap rates on record, according to New York-based Real Capital Analytics.

It may take months for buyers and sellers to negotiate and close enough deals for the effect of higher interest rates to show up in the data.

Many potential sellers are waiting to put properties on the market until they know what new cap rates buyers and sellers will accept as interest rates rise.

“I recommended to the bands that came to see me this summer to think about selling to wait,” says Fitts. “Trading volume will slow in the second half of 2022.”

Fundamentals remain healthy

Rising rents and high occupancy rates could eventually help buyers and sellers agree on the price.

“We’ll likely see a decrease in transactions until we see where rent rates land in the fourth quarter of 2022 and start showing what rent growth is achievable in the first quarter of 2023,” Swick says.

Preliminary data already shows very strong demand.

“National pre-lease and rent growth is at record highs,” says Carl Whitaker, director of research and analytics at RealPage, Inc. “The 2022 academic year is likely to begin with record numbers on both fronts.”

As of June 2022, 86.2% of beds were pre-rented for the fall 2022 academic year at the top 175 universities tracked by RealPage Market Analytics. This is the highest on record for June by RealPage. It is also higher than the pre-rental rate in July in recent years.

Actual asking rents are also up by 5.8% compared to the previous year on average. This is more than triple the average rate of growth in rents over the past few years.

Rents for student accommodation beds could rise further. “You’ll likely see bigger rent increases in the coming year,” Fitts says.

Many student accommodation operators had been cautious in raising rents ahead of the 2021-2022 academic year. “Everyone was a little more reserved about their renewal rates,” says Fitts. “There was some uncertainty in the market.”