Campus Complement: Purpose-built student accommodation poised to fill void in the Canadian housing market.

BACK TO SCHOOL

Student Housing in a Post-COVID World

FALL IS HERE and university towns are about to get busy. This is great news for local business owners who’ve been fighting to stay afloat through the pandemic, but for residents wary of COVID-carrying newcomers, it’s nothing to rejoice about. Nor is it for the hapless students who arrived to a barrage of “No Vacancy” signs.

“This is a real issue,” says David Hutniak, Chief Executive Officer of LandlordBC. “Finding suitable offcampus housing has been a serious struggle this year for post-secondary students, particularly in Victoria. In Vancouver, we’re not hearing about the same level of challenges as what we’re seeing in Victoria, but there is still a real need for more rental housing.”

Adding to the list of issues, University of Victoria’s longstanding practice of guaranteeing on-campus housing to firstyear students had to be put on hold due to uncertain provincial guidelines when the application process first opened.

“Then there was the unexpected growth in UVIC’s student population, which now sits at roughly 20,000,” Hutniak recounts. “With close to 80% of that number coming from outside Victoria — a city that’s had persistently low vacancy rates for many years prior to the pandemic — there’s simply not enough off-campus housing to fill the need.”

Hindered by nimbyism, municipal inertia, and what Hutniak refers to as “a City Council that does not appreciate the significant costs and risks that go with building and operating rental housing,” rental developers and lenders have been hesitant to commit to future purpose-built rental developments. There are also pressures in the secondary market (i.e., basements suites and single-family homes), which represents a large proportion of the rental universe.

“We’ve seen shrinkage in that market as many homeowners with secondary suites or revenue properties have increasingly chosen to capitalize on the ridiculously hot sales market and sell,” he says. “Combine that with what appears to be an unfolding phenomenon that the new buyers of these homes are not interested in being landlords and there’s less of this rental than there used to be.”

Meanwhile, COVID posed additional challenges for landlords, who were suddenly faced with an eviction moratorium, rent increase freeze and constantly changing health and safety guidelines. When balanced against increasing costs, including taxes,

By Erin Ruddy

insurance, utilities and maintenance, it all conspired to push them out of the industry for good.

“When they looked at the risks and rewards associated with being a landlord, there were better places to invest their money without as many challenges,” Hutniak submits. “This is a very concerning trend, especially in a small market like Victoria that’s so dependent upon the secondary market and not creating anywhere near enough new purpose-built rental.”

PURPOSE-BUILT POTENTIAL Rental housing shortages certainly aren’t confined to the west coast, and some experts argue that more purpose-built student accommodations (PBSAs) are needed wherever colleges and universities exist. A recent market report by BONARD on behalf of Alignvest Student Housing concludes Canada has, proportionately, far less student-geared housing than other comparable nations, despite being one of the fastest-growing destinations for international students.

Exceeding both the United Kingdom and the United States in terms of annual growth, fulltime enrollment in Canadian institutions has grown by 18% since 2010/2011, and all signs indicate they will continue to attract foreigners seeking a quality education.

“There is definitely room for more development,” says Trish MacPherson, Partner at Alignvest Student Housing. “Purpose-built student accommodations are highly desirable versus generic rental housing because they are tailored to students and typically located within a ten-minute walk of campus — or as we like to put it: the duration of three songs.”

Unlike generic apartments, PBSA buildings offer residents the opportunity for privacy and community, with single rooms within a shared suite ranging from two to six bedrooms. The student-geared amenities include common kitchens, laundry rooms, games rooms, bicycle sheds, car parking, outdoor areas, party rooms and gyms, and residents can choose ensuite or shared bathrooms depending on their budget and preference.

“The pandemic situation strongly affected student socialization, which is an important part of the added value offered at PBSAs,” says MacPherson. “Secondyear students coming out of residence, or for those who missed out on the first-year experience in 2020/2021, will benefit from being close to school in a new building surrounded by their peers where they can access built-in services and supports.”

Though off-campus PBSAs are traditionally more expensive than on-campus and other non-commercial student residences, MacPherson says their added value is reflected in continued high occupancy levels and the ever-increasing interest shown by investors. Currently, Alignvest’s properties are more than 95% occupied and, all tolled, account for about 4,700 beds. Despite COVID, the company recently expanded with three major acquisitions since March 2021: THEO in Ottawa (507 beds); Preston House in Waterloo, Ontario (310 beds); and Bridgeport House, also in Waterloo (485 beds).

“This is a stable, resilient sector that has really proven itself,” MacPherson asserts. “COVID created a lot of challenges, but students still wanted to be near each other, safely partaking in normal activities. Our properties were able to facilitate that.”

Whether it’s to offset housing need in areas lacking in rental units, or to deliver that coveted student-life experience, the consensus according to the BONARD report, is that the Canadian off-campus PBSA market is poised for growth: “Despite the prevailing uncertainty around the education sector over the past year, it is thought that Canada’s position as an established education market and its low student housing provision rate will allow the sector to grow substantially once the pandemic is curtailed.” zz

FUNDAMENTAL DRAW

By Barbara Carss

Strong fundamentals continue to draw investors to the purpose-built rental housing sector despite a pandemic-related squeeze on already tight margins.

“There’s just an insatiable demand amongst institutional capital to be in the multifamily space, to have a higher allocation to multifamily space than they have traditionally had, and to own really good product,” Paul Morassutti, CBRE Canada’s Vice Chair, valuation and advisory services, observed earlier this summer during a webinar examining Canadian commercial real estate dynamics. “Buying brand new apartment buildings, certainly at scale, is virtually impossible so there’s now this desire to create product. If the initial returns are skinny, I don’t think they care because, down the road, they will own the type of assets that they’d like to own.”

Proponents with shallower resources and/or shorter horizons for investment returns have a tougher business case. Citing a recent report from the consulting firm, Finnegan Marshall, which found that construction costs rose by 53% over the past five years, Morassutti estimated that additional increases in development charges, contributions procured through Section 37 of Ontario’s Planning Act and spiking land prices have actually pushed up costs by as much as 75% since 2016. Typically, developers need about a 3% gain in revenue to balance out a 10% jump in costs.

“On the condo side, revenue has also increased, so the condo industry has been able to absorb a lot of these costs and continue forward,” Morassutti acknowledged. “The pressure has been most acute on the purpose-built rental side and that’s because, even pre-pandemic, the returns for that type of development were very skinny. You have a combination of construction costs going up and revenues not moving so it is really making a lot of these pro formas difficult to pencil out.”

Rental revenue slippage is expected to be short-lived once COVID-18 wanes. Looking farther into the future, homeownership affordability barriers are likely to keep a growing portion of urban dwellers in rental accommodations.

Morassutti also speculates that many of today’s asset-rich homeowners will feed an uptick in demand for purpose-built projects that offer secure tenure. In particular, he points to a largely uncounted but presumed significant cohort of near-retirees who have inadequate savings for the future.

“I think a lot of those households will cash out of their houses and move into rental product, and they’re not going to move into a 400-square-foot condo with an owner who can evict them at any time,” he submitted.

Flight to the suburbs, or even farther afield, is likewise projected to abate as urbanites are again immersed in the lifestyle that drew them downtown in the first place.

“The cities are back,” asserted Benjamin Tal, Deputy Chief Economist with CIBC World Markets. “The premium of living in a city, when the city is shut down, is zero. When you open back up, the premium is all of a sudden much more significant.”

Erin Ruddy is the Editor of Canadian Apartment.