Student Housing Coming of Age
Where there are opportunities there are always challenges, and the student housing market is no different. Beyond potential overdevelopment, issues also arise from the quick develop-and-sell formula some companies in the space have pursued over the past few years.
“Understand university growth and supply and demand, but let’s not become the next homebuilding sector of 2007,” Stark warns. “This is a management-intensive business, so the right people on the ground are the key. You always have to be on the lookout for standout for great people, be slow to hire and hire for talent, personality and drive. People first!”
Indeed, student housing is operationally intensive. Student housing owners need solid operators. Rollins says it pays to be fully vertically integrated. That’s why Campus Crest controls everything from the development company to the general contractor and supplier to the property manager as well as the asset manager.
“This creates a competitive advantage because our cost structure is better in each of the assets and it allows us to continually improve the level of quality and service to the resident, which results in a stickier resident,” Rollins says. “We call this compounding knowledge and this is something we have done from the very beginning. We use our operational experiences to continually upgrade both our product design as well as our operating protocol.”
Unlike traditional multifamily, every year there is a high level of turnover in student housing. Nelson points out that owners may only be renewing 30% of the project. That shortens the rental cycle. The solution, again, is to partner with strong operators. But that challenge still scares many developers away from the niche opportunity. “The investment requires oversight, because you are dealing with 18- to 23-year-olds,” Nelson says. “For years, many people stayed away from student housing projects until they saw how resilient they were during the economic downturn.”
What Investors Really Want
Even as student housing developments are getting underway, investors are snapping up existing product. So what do investors really want? Ultimately, returns and value. Student housing fits the bill as a stable investment serving institutions that have been around for decades—some even more than a century.
“There are some new equity entrants into the space that are looking to diversify from conventional multifamily,” says Pete Benedetto, a senior vice president with Horsham, PA-based third party commercial mortgage servicer Berkadia Commercial Mortgage. “Student housing can often provide higher returns than conventional multifamily investments.”
Student housing offers a spectrum of risk-return profiles, such as university enrollment size, distance to campus, low- to high-cost provider, core versus value-add versus new development. Campus Evolution seeks a mix of these asset types, all with value-added components.
“Anyone can look to execute upon a physical improvement program but the rubber really meets the road through seizing upon turning around under-managed properties,” Stark says. “It is hand-to-hand, day-in-day-out, and through that we can yield strong returns in a relatively risk-averse investment sector.”
What’s Coming Down the Pike?
The student housing sector is benefiting from some of the same factors as traditional multifamily housing: low interest rates and investors with plenty of capital to spend. As long as interest rates remain stable, most industry watchers don’t expect any major disruptions in student housing—notwithstanding any black swan events.
“One area we’re watching is the ongoing increase in online classes, which many public companies compare to the old correspondent school phenomena in the 1950s,” Bobilin says. “Many schools are adding online programs but it is more of an additional revenue generator than a business plan shift. However, we don’t want to discount the long-term effects of this on the marketplace as it could prove similar to how Internet-based businesses have disrupted longstanding bricks-and-mortar businesses.”
Benedetto expects the student housing space to remain relatively stable. From a financing standpoint, he predicts CMBS lenders will continue providing a greater portion of the financing. “Before the recession, CMBS lenders were responsible for the vast majority of student housing financing,” he says. “The GSEs and life companies will likely continue to lend in the space, but we’ll probably see the most aggressive financing come from CMBS.”
Stark has watched as public student housing companies pulled back on the acquisition spree—but he sees the public players coming back to the student housing market even if it’s at a more restrained pace and curbed appetite.
“The latter part of 2013 and 2014 has seen some slowing in activity and perhaps even some price expectations,” Stark says. “We were very active in 2013 in all-priced acquisitions and as the bid/ask tightens later this year, perhaps after summer closes out, we expect to be active. The changes coming, and already being seen, will be in strike pricing. We also anticipate new development starts to slow a bit.”