Student Housing Q&A with Fred Pierce: Demand Remains Strong
Student Housing has seen the same volatility as any other real estate sector in 2022, but according to Fred Pierce, President and CEO of San Diego-based Pierce Education Properties, fundamental demand has never been higher. Pierce, who has been named one of “50 Influential Leaders in San Diego” by the San Diego Daily Transcript, leads a company that operates a nationwide portfolio of over 8,000 beds and has completed more than $1.1 billion in acquisitions. Pierce took some time recently to discuss the current state of the Student Housing Market.
Q: What are the most interesting opportunities to invest in student housing right now?
Pierce: Value add properties at public universities with 20,000+ undergraduates or 25,000 total students that play in the Power Five football conferences or the Group-of-Five conferences when located in major MSAs.
Q: Did the fall season reveal anything unexpected about investor demand for student housing?
Pierce: Demand for investment in Student Housing in 2022 has experienced the same pull back that is impacting most all sectors of commercial real estate. Many, but not all, equity investors are seeking transparency as to where values will settle in this current interest rate environment. This type of wait-and-see scenario – which also happened due to COVID-19 in Q2 and Q3 of 2020 – is also creating purchase opportunities, particularly for value add Student Housing investments, for those with access to debt and equity.
Q: How have rising interest rates changed the landscape?
Pierce: We have heard from investment sales brokers that inflation and the related increases in interest rates has brought student housing valuations down about 10% from 2021 pricing. Would-be sellers have either pulled their properties from the market or been willing to proceed with a valuation adjustment or expectation. Most sellers will still be making handsome profits at 10% below 2021 pricing and buyers will get a good deal as pricing will rebound once inflation is tamed and interest rates fall.
Q: How has fundamental demand for student housing changed? How has this become visible in deals or data?
Pierce: Fundamental demand for student housing has never been higher with Fall 2022 occupancy nationwide registering 93.7% (up 2.5% over Fall 2021) and rents up 4.13% according to College House. National occupancy at Tier 1 universities (25,000+ enrollment) was 94.6% in Fall 2022. As of the end of October 2022, pre-leasing for next year (AY 2023-24) was already 7.4% ahead of last year’s strong pace.
Q: How is the capital flowing into the student housing changed and how is it affecting Pierce Education Properties?
Pierce: Similar to most all commercial real estate, debt and equity capital has flowed slower into student housing in 2022, as investors seek optics into true asset value. That being said, Pierce Education Properties has purchased four student apartment communities this year including at Clemson University and University of Georgia and has two more in escrow. All are value add investments where our team and our investors could clearly see the NOI and value growth through strategic renovations and rent growth. With lesser competition for acquisitions in the current market, we are able to secure much better pricing that can support higher interest rates for the shorter term duration of our planned investment period.
Q: What is your outlook for 2023?
Pierce: Our expectations for the future are for interest rates to stabilize and then start declining in 2023 and for spreads to narrow. This will bring down the cost of debt, make higher loan proceeds available and increase student housing values. At the same time student housing markets – occupancies and rents – will remain strong at America’s strongest public universities.
Mark comes to ConnectCRE with an extensive background as a business and news reporter in San Francisco radio, as well as 35 years as a traffic reporter on several stations including KGO, KNBR, KCBS and KFRC. As a business reporter, Mark covered the tech world in Silicon Valley where he became familiar with real estate transactions in the hot Bay Area marketplace. He attended San Jose State University with a BA in Radio and TV Broadcasting and currently resides in the Lake Tahoe area where he gets to frequently enjoy all of his favorite activities: Golfing, Fishing, Hiking and Skiing.
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