While developing new student housing isn’t easy right now, and the pandemic is forcing investors to think differently, the growth runway of the sector remains long in select markets.
Uncertainty, tight capital markets, labor shortages and supply chain disruptions are all contributing to a tough development environment.
New development projects can be completed right now, but this comes with additional delays and a volatile schedule. Developers are dealing with a shortage of subcontractors and materials, supply chain disruptions, increased carry period costs, skittish investors, and are haunted by the specter of another shutdown.
In New York City, for example, all nonessential construction was shut down at the height of the outbreak, and when the city reopened, new guidelines were implemented that impacted timelines and budgets. Completing projects in this environment requires constant communication—between developer and general contractor and subcontractors, developer and prospective tenants—and staying abreast of current guidelines to ensure safe and efficient construction can continue.
These challenges are forcing student housing investors to think differently, with a greater focus on contingency planning, potential design changes, and the increased adoption potential of online-only and hybrid courses, all while parsing through what changes are here to stay and which will pass.
DEVELOPMENT PHASES
For developments underway, investors are asking about general contractors’ pandemic plans, how much slack is built into the schedule, protocol if there is an outbreak on-site, and what happens if school isn’t open at delivery.
For developments in the planning phases, while it’s too early to project the extent of the disruption, many fundamental design tenets are being rethought. There will certainly be design changes in student housing projects surrounding density, pedestrian flow, HVAC and touchless access, as well as internal finishes and surfaces. As with so many other technologies, the pandemic has accelerated prop-tech. As the asset class serving the most tech-savvy consumer, student housing will be at the forefront of these trends.
In the short term, demand will shift to lower-density unit mixes as students will be spending significantly more time now in their housing than in any previous semester. Developers will continue to innovate with efficiently designed units comprised of modular components and flexible furniture, fixtures and equipment to try to make the pro forma pencil with a lower bed-to-unit ratio. Whether density is meaningfully reduced over the long term is an open question. Often, density is a necessity, both for developers and for many students to keep housing costs down and degrees achievable.
Operational protocols can go a long way as well, from sanitizing with electrostatic sprayers to shutting down common areas using a strict schedule for thorough cleanings throughout the day. Ensuring that Wi-Fi is lightning fast has never been more important with everybody streaming or video conferencing.
FUNDING CONSIDERATIONS
In addition to asset-level considerations, investors and developers are paying increased attention to state budget deficits and public university funding, the financial health, staying power and “raison d’etre” of many universities.
While historically, the massive open online courses were not met with widespread adoption, COVID-19 and the substantial investments being made by universities to offer online and hybrid programs in response, may be the catalyst to drive adoption of these virtual learning programs.
Despite these challenges, there are many reasons to be optimistic about the sector as the fundamentals remain strong for many university markets.
Reduced density on campus is making high-quality, professionally operated private housing more important than ever for the communities they serve. As beds are removed from universities’ inventories, an increasing number of students will be seeking off-campus accommodations—a trend evidenced by the fairly consistent year-over-year preleasing activity for purpose-built student housing nationwide. The current pipeline under construction, or already capitalized, will likely deliver, but deals in the earlier planning phases should abate, providing potential buying opportunities.
We expect the positive long-term trend in the student housing sector to continue post-COVID-19. Flagship public universities should continue to grow as higher education coursework becomes more affordable and accessible online. The hybrid teaching models universities are building today will enable them to instruct an increasing number of students using preexisting university facilities, thereby reducing the capital, space, and other resources required to grow enrollment. With this barrier lifted, enrollment and off-campus housing demand at competitive universities with growth mandates should experience consistent long-term expansion.
The value proposition of an immersive university experience was demonstrated again through the pandemic as students and parents complained when tuition was not reduced for full or hybrid online course loads—reinforcing the value of in-person learning and the residential experience, whether on or near campus. Much has been written of skyrocketing tuition costs, which, over the last few decades, have grown at a rate roughly double that of health care costs and eight times that of wages. Accessibly priced hybrid models could enable more on-campus degrees and become another growth engine for the student housing industry.
Not all ships will rise, however, and important consideration should be placed on migration and demographic trends, state and university fiscal health, and other market nuances.
James Jago is a principal at Pebb Capital (parent company of Pebb Student Living) where he oversees all investment activity and brings 15 years of diverse real estate and corporate transactional experience to the company.