The Year Ahead for the Student Housing REITs

The 2017-18 leasing season continues to illustrate solid results, not only for the student housing sector as a whole, but the publicly traded student housing REITs.

Leasing velocity for same-store properties nationally averaged 49% as of February, up 160 basis points from last year. For the same time frame, both American Campus Communities (ACC) and Education Realty Trust (EdR) reported 60% leased for same-store properties.

In terms of rent growth, ACC reported a projected 2.9% rental rate increase and EdR reported net rates to be up between 2.5% and 3.5%, compared to around 2% nationally. The REITs continue to outpace the rest of the market in terms of leasing velocity and rent growth.

New supply – REIT markets and development pipeline

Of the 47,000 off-campus beds expected to deliver this fall, nearly 28,000 will be delivered at universities where the REITs currently operate, though 7,000 beds are ACC and EdR developments.

In the 65 markets that ACC is in, 28 will see new supply in 2017, which is an uptick over 2016. As reported by ACC, this uptick can be partially attributed to a 300% increase in ACC’s own deliveries. ACC currently has 10 fall 2017 developments under construction (on- and off-campus) totaling 7,454 beds. For Fall 2018 delivery, ACC has commenced construction on U Club Townhomes, a 528-bed pedestrian development at the University of Mississippi and has executed a presale agreement for The Edge, a 412-bed pedestrian development at Florida State University.

In 2017, EdR will also see an increase in new supply from 2016. EdR’s active development pipeline is contributing to the increase. EdR’s development pipeline for 2017, 2018 and 2019 includes 13 developments, consisting of 8,926 total beds. The company also has joint ventures under construction at three universities for 2018 delivery or later:

• The University of Hawai’i, with 599 beds projected for 2018 or 2019 delivery.
• The University of Minnesota, with 707 beds projected for 2018 delivery.
• Arizona State University, with 857 beds projected for 2018 delivery.

REIT markets where new supply has created leasing challenges

As we see every leasing season, a few markets are more challenging than others. The University of Louisville and Texas Tech University are two that the REITs identified in that category this leasing season.

The volume of new supply delivered at the University of Louisville in recent years is contributing to slightly slower leasing in the market. ACC is combating this with master lease agreements for two of their assets. As of February, off-campus student housing at the University of Louisville (including ACC’s master leased properties) averaged 62.4% leased. If we exclude those assets, properties are only averaging around 41% prelease for next year. At the same time, rents have dropped -4.8% since Fall 2016. Meanwhile, EdR reported they’re still able to generate more than 3% rate growth in the market.

Texas Tech University is another one of the more challenging markets. As mentioned by ACC, Lubbock has seen close to 5,000 new beds delivered over the last two years, of which 3,700 are delivering this Fall. ACC is delivering 1,313 of the 3,700 beds at Texas Tech this Fall and expects to have their asset fully stabilized in the second year. EdR also mentioned big concessions being offered in the market, resulting in rent reductions.

As of February, off-campus student housing at Texas Tech averaged around 40% leased, down 890 basis points from last February. For the same time frame, Axiometrics surveys show REIT properties averaging above other properties in the market. And though some assets are seeing negative rent growth, the university overall is only experiencing -0.1% rent growth for this leasing season.

The lack of new supply anticipated over the next few years at the University of Louisville and Texas Tech will help market conditions going forward.