This is an HTML version of an article that ran in the May 2014 issue of Real Estate Forum. To see the story in its original format, click here.

A quick glimpse at commercial real estate headlines reveals student housing projects are being planned, approved and constructed from coast to coast. Many universities just can't keep up with the demand for student housing and developers are ready and waiting to pounce on new opportunities with modern designs that fill the off-campus housing gap.

Consider the statistics. Public university enrollment increased 38.7% from 2000 to 2010, according to Rental Roost. During that time, the apartment finder's research reports a 21.4% growth in students seeking off-campus housing. Rental Roost predicts the demand for off-campus housing will continue to increase alongside enrollment as universities fail to keep up with the demand. All this spells opportunities for student housing developers, owners, managers and investors.

“There are great opportunities in student housing to deliver beautiful, close-to-campus housing while creating returns for investors,” says Andrew Stark, principal of Campus Evolution, a New York-based student housing developer. “As the sector continues to grow into itself over the next five to 10 years, there will be a need for discipline by owners and investors to respond to the demands of students and universities. This is a sector ripe for new leaders, not merely aggregators and consolidators, but those who lead with a difference.”

Marking Student Housing Trends

Words like “quality,” “privacy,” “sustainability,” “technology” and “resort-style amenities” spring up in discussions about student housing development trends. Some even argue that student housing development trends offer a glimpse of traditional multifamily housing's future.

Jeff Larsen, a principal at Irvine, CA-based MVE & Partners, an architectural firm that has designed student housing for California State University, UC Irvine, University of Texas and others, sees low-density on-campus student housing giving way to high-density mixed-use projects off campus. Larsen points to Sandhu Residence Hall at Chapman University in Orange, CA, which his firm designed, as an example. MVE transformed a surface parking lot and a two-story student housing site into a compact three- and four-story mixed-use building with 300 beds, a 26,000-square-foot dining facility, and an 11,000-square-foot conference center—all above a single-level parking structure.

Although the initial cost for development for high-density student housing is higher, Larsen says there are benefits of intensity that translate into efficiencies of compact building footprints, better sharing of services and shorter distances to campus activities.

“I see a conflict between university goals of social and educational growth for their on-campus student housing and the developer-driven goals of appeal and socialization for off-campus student housing,” Larsen says. “Whereas on-campus building layouts focus on right-sized communities or 'neighborhoods' and the specific interests of living-learning communities to foster social interaction and intellectual growth, off-campus housing has a focus on independence and convenience.”

Judd Bobilin, CEO and cofounder of Chance Partners, an Atlanta-based student housing developer, says infill is the biggest trend in student housing. Publicly traded student housing companies want to understand walkable, higher-density product.

“The idea of building a project that is one or two miles from campus is a very short-term focus and doesn't take into account the long-term effects it might have on the communities that we build and own,” Bobilin says. “Merchant builders will continue to strive for any deals, but the major institutions that end up buying and holding these properties for years think much more about longevity of the asset. We operate on the concept of 'connected capitalism' in each of the markets in which we invest and develop.”

A Student Housing Flood?

Statistics show growing student enrollment and continued demand for student housing, which has attracted more student housing developers to the mix. Is there a danger of flooding the market with too much inventory, if not in the short-term then in the long-term? That depends on whom you ask. The big-picture answer, of course, is that it's a market-by-market issue and so far most student housing developers have been rewarded by their efforts with solid occupancy rates. But there are growing pains.

Campus Evolution's Stark, though, is a little concerned that there may be too much inventory flooding the market—at least in as many as a dozen markets over the past three years. Seeing opportunity, institutional capital has rushed to larger markets, creating excessive supply that will take time to absorb. Beyond those few markets, his research shows most universities can only house about 25% of their student bodies.

“That is where the privatized off-campus providers can work in unison with universities,” Stark says. “Most recognize that the private sector plays a key role and is more efficient. Thereby it frees university capital up for more important academia uses. In looking at new development, enrollment growth and in-place housing must be carefully balanced. We see strong growth in the sector for years to come, if strategic and thoughtful, in the pursuit of opportunities.”

About 60,000 beds were delivered over the past year, which is a lot in comparison to just two years ago, says David Nelson, senior vice president of development at Atlanta-based real estate investment, development and advisory firm Carter. But he agrees with Stark—overbuilding is a market-specific question. He says, “We are developing a project in Boise, ID in which the past seven years have brought no deliveries of off-campus housing, versus other universities that have had multiple projects delivered in the past several years.”

Ted Rollins, CEO of Campus Crest Communities, a Charlotte, NC-based student housing developer-operator, has a different perspective on the overbuilding question. He sees the real story in this industry as the transition from older product, which is mostly non-purpose built, to purpose-built student housing “Our research indicates that there is a meaningful backlog of demand for the purpose-built product and that given the choice, the student will choose this type of living experience,” he says. “So, we have a high degree of confidence that any oversupply is limited to some local markets and is not broadly an issue.”

The Opportunities

Rollins touched on one piece of the student housing opportunity puzzle. But developers see opportunity across the board—and in many markets.

“The student housing sector has performed better, on an operational basis, than multifamily over the five-year period,” Bobilin says. “During the last downturn, student housing wasn't immune to the effects but withstood the impact in greater proportion than strictly conventional product.”

Nelson sees opportunities split between tier-one universities that have nominal growth but are providing higher-end, walkable communities that haven't previously existed and second- and third-tier schools that are posting growth. Carter's Tetro Student Housing Village near the University of Texas at San Antonio is a good example.

“Over a 10-year period, the school grew about 40% and added close to 9,000 students,” Nelson says. “In years prior, the school was commuter-driven, but during this growth, you saw the university reinvest in itself by providing on-campus housing, new academic facilities and a new fitness center. In addition, you saw a city growing around it. Student recruitment into jobs within the major metro area is also picking up, helping to make the university an attractive location for students.”

Campus Crest sees opportunity in what Rollins calls the “right blend” of markets across the US and Canada. The firm invests two-thirds of its money in markets featuring public higher-education systems with schools that are not “name brand,” such as University of North Carolina Wilmington. As Rollins sees it, schools like UNC Wilmington are the backbone of public higher education in the US.

“These schools educate approximately 47% of the population that attend public universities,” Rollins says. “The average enrollment is approximately 14,000 to 15,000 undergrad students and the average tuition per year is a little less than $10,000. These schools offer the highest value in education. The other one-third of our portfolio is located in markets with flagship schools like the University of Florida. We have found a great niche in Canada in the past year as these students are looking for a better housing product and the market is underserved.”

The Challenges

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.”