Capitalization (CAP) rates for Class-A Student Housing Properties seem to be on a declining slope. In 2017 they were reported to be in the 5.4%. The average CAP rate for Class B/C assets in 2017 remained almost unchanged at 6.2%. This spread of cap rates resting at 80 bps between Class-A and Class B/C is one of the widest spreads seen in recent years. While institution and other core asset buyers continue to seek low-risk products, an emerging group of seemingly opportunistic buyers are maintaining a laser focus on value-oriented acquisitions of student housing properties. Many of these buyers may well be priced out of the Class-A markets, but in the B/C environment they tend to enjoy much stronger yields. This is driving a steady, increased demand for Class B/C product and increased competition to find strong investment opportunities in primary markets. If this holds true, then Class B/C products should remain close to 6% throughout 2018.
Who are the buyers for student housing properties? Well, consider that foreign capital reportedly accounts for almost 50% of sales in 2017. It would seem, therefore, that the view of foreign capital towards student housing in the USA is a very viable and attractive alternative investment vehicle as compared to the national economic options. Private equity in the United States was about 8%; syndicators came in at about 18% and operator/funds at 14%. REITs/Family Offices and Pension Funds made up the difference.
And what about the sellers? Look to the Funds to represent 60% of the sellers in the market last year. 25% were Developers who finally came forward and had to develop or lose their entitlements. Lenders, private equity, syndicators and tenant-in-common (TIC) investors made up the balance with TICs coming in at only about 1% of that residual balance. Consider that developers will likely be active sellers in this space when you consider the pipeline of new supply that is on the books and underway across the Nation.
Karen E. Kennedy is available to the media for expert insight into commercial real estate industry issues as well as for speaking at Industry seminars and leadership conventions.