The student housing business has matured a lot recently. If we go back seven or eight years, the average property buyer was not willing to pay more relative to income for student housing properties with strong locations in markets that serve tier-one universities compared to tier-two universities. In contrast, for many years American Campus Communities (ACC) has focused on core pedestrian product serving major universities.
Today the investment community as a whole is very educated on how core properties located within walking distance of large, tier-one universities usually show the strongest net operating income growth over time. This strong outlook for income growth helps these properties sell at premium prices relative to their current income.
The other big change you have seen in our sector is the substantial increase in interest from investors. Nearly a third of the private capital deployed in 2014 was new to the sector, according to CBRE. In recent months, high-profile, institutional fund investors have made significant student housing acquisitions, signaling the acceptance of student housing as an established investment class of real estate with strong growth fundamentals. As a result, capitalization rates for student housing are now just 13 basis points higher than average cap rates for multifamily properties overall. (Cap rates represent the income for properties as a percentage of sale prices. Investors pay lower prices relative to income, and higher cap rates, for properties they perceive to be relatively risky.)
The student housing business will have the wind at its back over the next five years, which will result in strong operational and investment results. The 500,000 beds tracked by data firm Axiometrics are 95.8 percent occupied for the current academic year with strong preleasing and rental rate growth projected for next year. This is despite a record level of new supply delivered last year. As we look to next year, new supply is 20 percent lower than last year, and 30 percent of the markets with new supply did not have any new supply in the past four years. Also, enrollment growth remains strong at tier-one universities. In the 74 markets where ACC owns properties, we have seen 1.34 percent enrollment growth, with 89 percent of our markets seeing stable to increasing enrollment.
Strong fundamentals coupled with deep investor interest positions student housing to outperform for many years to come.William Talbot is the CIO of American Campus Communities.