University of California, Irvine’s Mesa Court Towers, designed by Mithun. (Bruce Damonte)

Investors continue to pour money into U.S. student housing projects. Despite shrinking yields and rising development costs, transaction activity in 2017 was “very strong” after a record volume in 2016, says Jaclyn Fitts, director of student housing for CBRE.

About $8 billion was invested in student housing in 2017, compared with $9.8 billion in 2016, but that represents volumes three times higher than 2014, Fitts says. More than 40 percent of the deals in the last year were driven by international groups, she says. That includes Scion Student Communities’ $1.6 billion deal in December with the Canadian Pension Plan Investment Board and Singapore’s GIC Private Limited to buy three student housing portfolios.

“There seems to be a lot of pent-up demand,” Fitts says. “The number of available properties is much less than the demand and equity available.”

But after years of rapid growth, the student housing market is starting to mature, analysts say. The market is beginning more of a “normalized investment cycle,” says Travis Prince, executive managing director of the National Student Housing Group for Colliers International.

“As the industry grows up, we’re seeing more stratification as an asset class,” Prince says. “Student housing is still a relatively new phenomenon.”

The industry has been propelled by a perfect storm of converging trends—growing student populations; the escalating competition to attract students; and consistent yields for student housing that often surpass those for multifamily projects.

Enrollment continues to rise on many campuses around the country, with high school graduates attending college at record rates. In 2017, 20.4 million people in the United States were studying for a postsecondary degree, compared with 6.6 million in 1990, according to the National Center for Education Statistics.

Builders have been racing to catch up. Developers were expected to deliver 46,000 new student housing beds for the fall 2017 semester, with another 42,000 scheduled to come on line in fall of this year, according to Axiometrics, which tracks the industry.

Many universities have gone through a building boom in recent years. For example, Florida State University added 3,000 beds and Texas A&M University 2,500 beds in the last year alone, Axiometrics reports.

As a result, rents in many markets are flattening as new supply comes on line and students—and their parents—push back on rising costs.

“Some markets are clearly oversupplied,” Prince said. But the excess inventory will likely be absorbed as enrollments continue to grow, he says.

Nueva East at the University of California, San Diego, designed by Mithun. (©Plompmozes)

The underlying trends of the market are “still favorable,” says Mike Scwaab, senior director for TH Real Estate, an investment firm. “We still think there is an opportunistic premium for students when compared to multihousing,” he says. “It may be thinner, but it’s still a premium.”

TH’s properties saw slightly slower take-up at the start of the 2017–2018 school year, but ultimately finished above plan, Scwaab says. About 97 percent of student housing beds in TH’s properties are occupied, he says.

In general, TH is shying away from expensive, high-end, ultra-amenitized projects, Schwaab says. “We continue to like to focus on schools and projects that will attract middle-class students,” he says. That often translates to a “focus on larger state schools where tuition is more reasonable,” he says.

As the market evolves, developers and investors are tweaking their strategies. Construction costs are growing and it is becoming increasingly difficult to find reasonably priced land near growing campuses.

Schools are increasingly looking to design-build frameworks and public/private partnerships to redevelop older, obsolete properties, analysts say.

In October, Austin-based American Campus Communities, a real estate investment trust (REIT), reported that it was working on 19 public/private deals for on-campus housing, totaling $1.1 billion and 12,200 beds. Another REIT, Memphis-based EdR, said it completed deals for five on-campus public/private partnerships in the first three quarters of 2017, and was pursing more than 30 more, according to coverage in National Real Estate Investor, which tracks the industry.

“What we look at with student housing has less to do with the yield, but really about the stability of the institution,” says Gabriel Grant, a principal in Seattle-based Spectrum Development Solutions, which is building student housing projects in the Northwest.Housing needs vary tremendously from campus to campus, with many smaller schools racing to catch up with bigger universities, he says. The sweet spot for development is typically within walking distance of the campus, analysts say. 

“Community colleges more and more are going to be a source of student housing development,” Grant said. “Community colleges in a lot of areas are becoming more important pieces of the secondary education puzzle.”

Designs also are changing. “Boutique” projects are becoming more popular, analysts say. And splashy amenities like infinity pools and game rooms are being replaced by study areas and larger kitchens, as campuses look for new ways to develop learning environments.

The “big amenity” these days is a “mix of academic spaces,” says Bill LaPatra, a partner in Mithun, a West Coast–based design firm that is working on several student housing projects, including a competition for a 3,000-bed public/private partnership for the University of California, Santa Cruz.

Campuses are looking for new ways to include collaborative spaces, incorporating learning environments into the living areas. At the same time, bedrooms are getting smaller in many designs, but social spaces are growing larger, LaPatra says.

“We’re trying to give students flexibility,” he says.

With housing a key recruiting tool for universities, facilities are taking a more holistic approach to catering to tenants, he says. Mithun was recently hired to work on a $211 million, 712,000-square-foot (66,100 sq m) housing complex for the University of California, San Diego, which will include 1,374 beds and spaces to promote health and wellness.

“Academic, social cohesion, wellness—they are all being infused into housing,” LaPatra says. 

Demand for modern housing close to campuses continues to remain strong, especially at name-brand universities, which are looking for new ways to expand. Last year, the University of Southern California unveiled the 15-acre (6 ha) USC Village, a $700 million mixed-use facility with retail space, a dining hall, a 30,000-square-foot (2,800 sq m) fitness center, and housing for 2,500 students.

The off-campus housing industry is still showing “solid results and sustained growth,” Axiometrics concluded in a recent report. Many campuses that are struggling “are expected to rebound over the next year, though a few will continue to underperform until development activity slows,” the service says.

Like many mature markets, performance is starting to vary from market to market, with rents continuing to increase around the majority of schools, analysts say.

“I think we’ve seen a slowdown in development,” Prince says. “But the right product in the right market will continue to attract a lot of attention.”