The student housing submarket has not been immune to the effects of the ongoing COVID-19 pandemic and this Fall semester has been anything but conventional across the nation. We chatted with Omar Eltorai, market analyst at Reonomy, about the student housing market as the Fall 2020 semester comes to a close.
Q. Thanks for taking the time to speak with us. To start off, I’d like to get your thoughts on the student housing market as we sit right now in 2020. How has it been affected by the ongoing pandemic?
A. Student housing, like so many other commercial property types, was negatively impacted by the pandemic. In the early months of the pandemic, the challenges raised for student housing were operational in nature and varied widely from one university community to the next. These operational challenges were fueled by the extraordinary times which raised uncertainty across university administrations. While many large student housing owners and operators have appeared to weather the worst of the immediate pandemic shock by making necessary health and budget adjustments to properties and financials, smaller owners and operators with less influence at the schools were likely hit much harder in terms of higher vacancy rates and expenses as well as lower collections and net operating income.
In addition to the negative impact on near-term operating performance, the pandemic has introduced some sizable headwinds for student housing going forward. These headwinds fall into two categories – demand headwinds and supply headwinds. The partial or complete adoption of virtual curriculums and weakened financial viability of many universities are two major demand headwinds for student housing. While on the supply side, two headwinds raised by the pandemic are the potentially major (expensive) overhaul of student housing properties to be more health-conscious post-pandemic (e.g., less dense, fewer shared amenities) and the potential for cheaper off-campus housing options to open up, if the de-urbanization trend across many metros continues. Together, these headwinds will likely continue to be in focus through the end of this year and for the foreseeable future.
Q. When can we expect to see a recovery in the student housing segment? Do you expect the adoption of virtual learning to lead to a lower overall interest in the category for investors and lenders going forward?
A. The student housing recovery will likely be slow and steady through 2021. The delivery and distribution of an effective vaccine will give many school administrators and students confidence to return to campus, which will help student housing property performance and boost investor demand for the property type. However, the availability and adoption of virtual learning will vary across campuses and make local market due diligence even more important for student housing investors. Barring any sort of major jump in enrollments, the demographic and market challenges that face student housing as a whole in the coming years will likely decrease valuations and dampen the expected returns investors see in this property type.
Q. Do you foresee future student housing developments, which have historically been very dense, being built with more space and “social distancing” features/amenities or do you think that is just a fad?
A. Some universities may recognize the pandemic as an opportunity to upgrade out-of-date on-campus housing, and as a result will create less dense, more modern residential space with their upgrades; however, for the most part, I don’t see the wide adoption of extreme de-densification across most of student housing. At this point in time, I don’t expect a scenario where deadly pandemics are common and recurring. If they are, then I would think that more universities would simply keep students off campus and shift fully to virtual learning, rather than bringing all students onto campus, only to be quarantined or social-distanced in their housing. I do, however, see a potential for student housing properties to become more flexible with their designs and operations (perhaps having the ability to flex to a mixed use property if necessary), as well as revisiting their return on investment decisions when it comes to amenities. It will be interesting to see how student housing owners shift their amenities over the coming years – balancing the two considerations of market competition and pandemic lessons.
David Cohen is Southeast Editorial Director at Connect Commercial Real Estate. David is a media veteran with more than 10 years of experience in journalism, copywriting and communications across a variety of roles.
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