Marked by the shift from the low interest rates and rapid action that defined the previous two years, 2023 emerged as a transition year that introduced a notably different financing landscape, where “higher for longer” entered our vernacular.
Despite this shift, there were several positives for the student housing sector—from steady, high occupancy and rent growth to signs that operating expenses and construction cost inflation were beginning to wane. However, these positives were tempered as rates continued their rise through the summer months. Appetites for dealmaking suppressed on both sides, as widespread aversion to negative leverage widened the gap between buyers and sellers.
The dynamic environment further challenged underwriting assumptions across a number of metrics, such as return expectations and exit caps to rent growth and insurance costs, which impacted southeastern markets. Nonetheless, determined parties managed to cut through the fog and execute deals. The fall months saw a small flurry of activity despite tough conditions: In October, both Treasury yields and student sales transactions peaked for the year, along with the average cap rate of those completed sales.
As 2024 begins, the prevailing sentiment in the capital markets industry reflects cautious optimism, tempered with a sense of realism. Despite persisting challenges, the robust fundamentals for student housing should give confidence to all market participants and encouragement for dealmakers to persevere, especially as the sector continues to stand out in the broader commercial real estate landscape.
The following are our predictions for student housing in 2024, as well as a recommended game plan with strategic insights for navigating and excelling in this evolving market.
Top Five Predictions for 2024
- Early Optimism and Strong Finish
- There is a universal sense among market participants that the worst is now behind us, but deal making hasn’t returned en masse. The combination of low product availability in the market and the presence of sidelined buyers will contribute to a sluggish first half of the year, but we should expect deal volume to pick up in the second half and finish with a flurry of activity.
- There is a universal sense among market participants that the worst is now behind us, but deal making hasn’t returned en masse. The combination of low product availability in the market and the presence of sidelined buyers will contribute to a sluggish first half of the year, but we should expect deal volume to pick up in the second half and finish with a flurry of activity.
- Another Year of Operational Bliss
- Prelease velocity for the fall of 2024 remains robust, especially in Tier 1 and 2 markets, matching the historically strong performance in the two preceding leasing seasons. Schools continue to receive record numbers of applications, and further enrollment growth will support high occupancy rates in many markets and fuel continued rent gains. While there are signs that overall rent growth rates are beginning to return closer to historical norms, they will continue to outperform most other property types.
- Prelease velocity for the fall of 2024 remains robust, especially in Tier 1 and 2 markets, matching the historically strong performance in the two preceding leasing seasons. Schools continue to receive record numbers of applications, and further enrollment growth will support high occupancy rates in many markets and fuel continued rent gains. While there are signs that overall rent growth rates are beginning to return closer to historical norms, they will continue to outperform most other property types.
- Wave of Distress?
- Strong operating fundamentals will continue to help avoid fire sales for student properties, which means that bargain seekers will be left waiting for the distress that may never materialize. Office and conventional multifamily are likely to see further distress, as loans mature and cash flows erode—but student housing’s resilient performance is expected to allow refinancing, recapitalization or market exit opportunities for those with maturing loans.
- Strong operating fundamentals will continue to help avoid fire sales for student properties, which means that bargain seekers will be left waiting for the distress that may never materialize. Office and conventional multifamily are likely to see further distress, as loans mature and cash flows erode—but student housing’s resilient performance is expected to allow refinancing, recapitalization or market exit opportunities for those with maturing loans.
- Capital Flows Favor Student Housing
- An increasingly larger share of the $250 billion allocated for U.S. real estate opportunities is being dedicated to alternative asset classes, especially student housing. Alternative sectors stand to benefit most from the reduced investor appetite for office, and strong fundamentals will help student housing compete against other alternatives.
- An increasingly larger share of the $250 billion allocated for U.S. real estate opportunities is being dedicated to alternative asset classes, especially student housing. Alternative sectors stand to benefit most from the reduced investor appetite for office, and strong fundamentals will help student housing compete against other alternatives.
- Bridging the Gap
- Price discovery was the theme in 2023, with considerable bid-ask spreads: Rising rates, resistance to negative leverage, resetting rent growth, and operating cost forecasts all created a considerable gap between buyer and seller expectations. Today, that divide is narrowing as general partners and sponsors reset their expectations, but the gap persists with equity. The lack of transaction volume gives too few data points for equity investors to act with conviction, while the market dislocation has created new opportunities to generate higher risk-adjusted returns elsewhere in the capital stack. Expect equilibrium to return to the transactions market once common equity is successfully repriced.
- Price discovery was the theme in 2023, with considerable bid-ask spreads: Rising rates, resistance to negative leverage, resetting rent growth, and operating cost forecasts all created a considerable gap between buyer and seller expectations. Today, that divide is narrowing as general partners and sponsors reset their expectations, but the gap persists with equity. The lack of transaction volume gives too few data points for equity investors to act with conviction, while the market dislocation has created new opportunities to generate higher risk-adjusted returns elsewhere in the capital stack. Expect equilibrium to return to the transactions market once common equity is successfully repriced.
Game Plan
- Early Aggression Wins
- We expect the end of 2024 to be particularly active for student transactions, but that also means the best opportunities may present themselves earlier in the year. As 2024 progresses, the risk for volatility rises: Fed actions, geopolitical conflicts, the U.S. presidential election, volatility in rates and other macro factors all add uncertainty to the investment climate. During the spring, while many groups are still proceeding with caution, those willing to act early—both on the buy and sell side—will be rewarded.
- We expect the end of 2024 to be particularly active for student transactions, but that also means the best opportunities may present themselves earlier in the year. As 2024 progresses, the risk for volatility rises: Fed actions, geopolitical conflicts, the U.S. presidential election, volatility in rates and other macro factors all add uncertainty to the investment climate. During the spring, while many groups are still proceeding with caution, those willing to act early—both on the buy and sell side—will be rewarded.
- Be Opportunistic
- Experienced, well-capitalized development and value-add players can benefit from the continued strong demand and diminishing supply risk in many markets. Materials and labor cost inflation is finally beginning to moderate, and the strong rent growth in recent years will help offset the higher cost of capital. Reduced availability of debt capital, along with its higher costs , will constrain new project starts. This scenario will create openings for strong sponsors with better-located projects to attract and reward the growing pool of investors that seek higher returns on opportunistic investments.
- Experienced, well-capitalized development and value-add players can benefit from the continued strong demand and diminishing supply risk in many markets. Materials and labor cost inflation is finally beginning to moderate, and the strong rent growth in recent years will help offset the higher cost of capital. Reduced availability of debt capital, along with its higher costs , will constrain new project starts. This scenario will create openings for strong sponsors with better-located projects to attract and reward the growing pool of investors that seek higher returns on opportunistic investments.
- Bigger is Better
- Flagship universities are expected to continue to attract the lion’s share of another large high school graduation class. Similarly, many owners and operators seek to quickly grow assets under management, while investors are ready to get off the sidelines and deploy capital in larger chunks. Expect to see several medium-to-large portfolios trading hands in 2024.
- Flagship universities are expected to continue to attract the lion’s share of another large high school graduation class. Similarly, many owners and operators seek to quickly grow assets under management, while investors are ready to get off the sidelines and deploy capital in larger chunks. Expect to see several medium-to-large portfolios trading hands in 2024.
- Manage Expectations
- The Fed will begin cutting rates in 2024, but it is likely that there will be fewer cuts and that they will come later than expected. Despite the cuts, market fundamentals are expected to keep Treasury yields and financing rates elevated for the near future, which will prolong the upward pressure on cap rates. Market participants will need to weigh the opportunity cost of continuing to wait for rates to fall against harvesting capital to redeploy into the recovery cycle.
- The Fed will begin cutting rates in 2024, but it is likely that there will be fewer cuts and that they will come later than expected. Despite the cuts, market fundamentals are expected to keep Treasury yields and financing rates elevated for the near future, which will prolong the upward pressure on cap rates. Market participants will need to weigh the opportunity cost of continuing to wait for rates to fall against harvesting capital to redeploy into the recovery cycle.
- Get Creative
- 2024 will be the year of creativity, where expertise can shine. Periods of dislocation offer significant opportunities to leverage one’s skills and experience as the process unfolds, and to develop new relationships that will be valuable through the next cycle. Winning in 2024 will require bold ingenuity to identify and capitalize on deals. In addition, deploying new technologies and establishing strategic partnerships will be crucial to seizing the unique opportunities this year will present.
