Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up College Dormitories
Transcript
- Lucas: So here's a number that stopped me this week: private equity firms now own roughly 15 percent of all purpose-built student housing in the United States. That's up from basically zero in 2010. Luna: Fifteen percent. That's a lot of beds. And I'm guessing most students have no idea their landlord is a billion-dollar fund. Lucas: Exactly. And it's not just the big state schools. We're talking about everything from University of Illinois to tiny liberal arts colleges that have sold their dormitories to raise cash. The driving force is this massive wave of capital that started around 2014, when student housing became a recognized REIT category. Luna: Right, the American Campus Communities IPO. That was the moment the market realized you could treat dorm rooms like apartment buildings with guaranteed demand. Lucas: Exactly. American Campus Communities went public in 2004, but the real explosion came after the financial crisis. By 2014, you had a half-dozen publicly traded student housing REITs, and private equity started piling in. The pitch is pretty straightforward: college enrollment is relatively recession-resistant, and students need housing near campus. It's a sticky, predictable cash flow. Luna: But sticky doesn't always mean profitable. What's the actual return profile here? Because I've heard some operators complain that maintenance costs eat everything. Lucas: It depends on the vintage of the asset. Pre-1990s dorms are money pits—cramped rooms, old plumbing, no air conditioning. But the newer purpose-built stuff, the so-called 'PBSA' properties, are built to a higher spec and command premium rents. The typical deal targets a 6 to 9 percent net yield, which is better than most multifamily right now. And the big play is not just rent—it's ancillary revenue: meal plans, summer conference rentals, parking. Luna: So the economics work for the funds. But what does it mean for the student? I've seen stories about rents going up 30 percent after a private equity takeover. Lucas: That's the central tension. When a university sells its dorms, it usually signs a long-term ground lease or a management agreement with the buyer. In exchange for an upfront payment—sometimes hundreds of millions of dollars—the university agrees to effectively outsource housing. The private equity firm then has the right to raise rents, typically capped at some formula tied to inflation or market rate. But here's the thing: the school often loses control over the student experience. Luna: And that's where the friction comes. Students complain about stricter lease terms, fewer ra led activities, more nickel and diming for amenities. Lucas: Exactly. There's a case study at the University of Illinois at Urbana-Champaign. In 2024, the university sold its south campus housing—about 5,000 beds—to a consortium led by Harrison Street Real Estate Capital for roughly $350 million. The deal included a 50-year ground lease, meaning the university still owns the land but not the buildings. Harrison Street then spent another $100 million on renovations. Rents went up about 25 percent over three years. Luna: And the university's rationale? They got an infusion of cash to plug a budget deficit and fund academic programs. They also offloaded deferred maintenance—some of those dorms hadn't been updated since the 1970s. Lucas: Right. The school was looking at a $200 million bill just to bring the buildings up to code. Selling was a way to get someone else to write that check. But the trade-off is that housing becomes a for-profit enterprise on a non-profit campus. Students feel it in their wallets. Luna: So is this model spreading beyond big public universities? I've heard of small private colleges doing it too. Lucas: Absolutely. In fact, the smaller schools are often more desperate. Places like Sweet Briar College in Virginia, or Hampshire College in Massachusetts—they've sold or leased their dorms to third-party operators to generate cash. The private equity firms love these deals because there's often a monopoly effect: if you're the only housing option within walking distance, you have pricing power. Luna: It sounds like a classic roll-up thesis. Fragmented market, mom and pop landlords, institutional capital consolidating. Lucas: It is exactly that. And the biggest player is Blackstone, which entered the space in 2022 by acquiring a majority stake in Campus Advantage, a manager of about 25,000 beds. Since then, they've been on a buying spree. They now own or manage over 100,000 beds across the U.S. and U.K. Their pitch to universities is: we'll build and manage your housing for you, you get a big check, and students get nicer dorms. But critics say it's just another way to extract value from a captive market. Luna: And what about the international angle? Because I know in the U.K., purpose-built student accommodation is already huge. Lucas: Huge is an understatement. In the U.K., private equity and institutional investors already own about 35 percent of all purpose-built student housing. The market there is more mature. Companies like Unite Group and GCP Student Living have been doing this for decades. The U.S. is about a decade behind, but catching up fast. And the same dynamics apply: universities strapped for capital, student populations growing, and a shortage of on-campus housing. Luna: Let's talk about the actual student impact. What's the experience like in a private equity-owned dorm compared to a traditional one? Lucas: It varies wildly. The best-run private dorms are genuinely nicer—newer furniture, better common spaces, faster internet, 24/7 gyms. But the lease terms are more aggressive. You might have to sign a 12-month lease for a room you only need for nine months. Some operators charge extra for parking or require a meal plan. And there's less flexibility if you want to cancel. The classic university housing office would often let you out of a contract if you had a hardship. Private operators are less forgiving. Luna: So it's a trade-off: nicer facilities but less student-centric policies. And I imagine the private equity firms are very focused on occupancy rates. If a dorm is 95 percent full, that's great. If it drops to 80, they might start cutting costs or changing terms. Lucas: Exactly. Occupancy is the key metric. Most of these deals are underwritten at 93 to 95 percent occupancy. If enrollment dips or a new competitor opens across the street, the financial model breaks. That's why you see operators aggressively signing leases early, sometimes before the academic year starts, and pushing automatic renewals. Luna: And what about the university's liability? If a private operator runs a bad dorm, does the school still get blamed? Lucas: Absolutely. The university's name is on the building. Even if they've sold it, students and parents see it as university housing. So there's a reputational risk. Most sale-leaseback agreements include quality standards and regular inspections, but enforcement is often weak. And if the operator cuts corners on maintenance, the university can't just step in—they've given up ownership. Luna: That's the real tension. The school gets the cash, but loses control over a core part of the student experience. Lucas: Right. And this isn't just a U.S. story. In Canada, the University of British Columbia recently did a similar deal with a private developer for a new 1,500-bed complex. In Australia, the market is dominated by institutional investors. Globally, student housing is now a $200 billion asset class, and private equity owns a growing slice of it. Luna: So what's the endgame? Does private equity eventually own a majority of on-campus housing? Or is there a backlash brewing? Lucas: I think backlash is already here. Student protests at the University of Illinois, at the University of Texas, at the University of California schools. There's growing awareness that housing costs are rising and that the people living in those dorms are generating returns for investors. Some state legislators have started asking questions. But the reality is, many universities have no other way to raise capital. They're caught between deferred maintenance and budget cuts. Luna: So it's a structural shift, not a fad. And it's likely to continue as long as tuition revenue stays flat and building costs rise. Lucas: Precisely. And that's why you'll see more deals, not fewer. The only question is how the terms evolve. Will universities demand more protections? Will regulators step in? For now, the trend is clear: private equity is buying your dorm. Luna: And if these conversations have helped you think more clearly about the business of higher ed, or given you a new perspective on the housing market, that's exactly what this show is for. We keep it ad-free and focused on the numbers because of listeners who support us at buy me a coffee dot com slash fexingo. It's a small way to keep the conversation going. Lucas: Yeah, we really appreciate that. It makes a difference. So back to the trend — one thing I find fascinating is how the pandemic actually accelerated this. In 2020, many universities were desperate for cash after refunding room and board. That opened the door for private equity to come in with liquidity on favorable terms. Luna: Right, the pandemic created a fire sale. And now we're seeing the aftermath: higher rents, more professional management, and a fundamental change in how college housing operates. Lucas: Exactly. And the next frontier might be community colleges. They typically have little to no on-campus housing, but some private equity firms are starting to build or buy off-campus housing near large community college campuses. That's a whole new market. Luna: Interesting. So the thesis expands. Any final numbers to leave us with? Lucas: Just one: the average rent for a private equity-owned dorm room in the U.S. is now about $1,200 per month. That's up from $900 in 2019. Compare that to the average on-campus rent of $800, and you see the premium. Students are paying more for what used to be a basic necessity. Luna: And that's the bottom line. Thanks, Lucas. Lucas: Thanks, Luna. Next time, we'll look at how private equity is buying up veterinary emergency clinics.