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

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A quick glimpse at commercial real estate headlines revealsstudent housing projects are being planned, approved andconstructed from coast to coast. Many universities just can't keepup with the demand for student housing and developers are ready andwaiting to pounce on new opportunities with modern designs thatfill the off-campus housing gap.

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Consider the statistics. Public university enrollment increased38.7% from 2000 to 2010, according to Rental Roost. During thattime, the apartment finder's research reports a 21.4% growth instudents seeking off-campus housing. Rental Roost predicts thedemand for off-campus housing will continue to increase alongsideenrollment as universities fail to keep up with the demand. Allthis spells opportunities for student housing developers, owners,managers and investors.

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“There are great opportunities in student housing to deliverbeautiful, close-to-campus housing while creating returns forinvestors,” says Andrew Stark, principal of Campus Evolution, a NewYork-based student housing developer. “As the sector continues togrow into itself over the next five to 10 years, there will be aneed for discipline by owners and investors to respond to thedemands of students and universities. This is a sector ripe for newleaders, not merely aggregators and consolidators, but those wholead with a difference.”

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Marking Student Housing Trends

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

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Jeff Larsen, a principal at Irvine, CA-based MVE & Partners,an architectural firm that has designed student housing forCalifornia State University, UC Irvine, University of Texas andothers, sees low-density on-campus student housing giving way tohigh-density mixed-use projects off campus. Larsen points to SandhuResidence Hall at Chapman University in Orange, CA, which his firmdesigned, as an example. MVE transformed a surface parking lot anda two-story student housing site into a compact three- andfour-story mixed-use building with 300 beds, a 26,000-square-footdining facility, and an 11,000-square-foot conference center—allabove a single-level parking structure.

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Although the initial cost for development for high-densitystudent housing is higher, Larsen says there are benefits ofintensity that translate into efficiencies of compact buildingfootprints, better sharing of services and shorter distances tocampus activities.

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“I see a conflict between university goals of social andeducational growth for their on-campus student housing and thedeveloper-driven goals of appeal and socialization for off-campusstudent housing,” Larsen says. “Whereas on-campus building layoutsfocus on right-sized communities or 'neighborhoods' and thespecific interests of living-learning communities to foster socialinteraction and intellectual growth, off-campus housing has a focuson independence and convenience.”

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Judd Bobilin, CEO and cofounder of Chance Partners, anAtlanta-based student housing developer, says infill is the biggesttrend in student housing. Publicly traded student housing companieswant to understand walkable, higher-density product.

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

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A Student Housing Flood?

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

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

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“That is where the privatized off-campus providers can work inunison with universities,” Stark says. “Most recognize that theprivate sector plays a key role and is more efficient. Thereby itfrees university capital up for more important academia uses. Inlooking at new development, enrollment growth and in-place housingmust be carefully balanced. We see strong growth in the sector foryears to come, if strategic and thoughtful, in the pursuit ofopportunities.”

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About 60,000 beds were delivered over the past year, which is alot in comparison to just two years ago, says David Nelson, seniorvice president of development at Atlanta-based real estateinvestment, development and advisory firm Carter. But he agreeswith Stark—overbuilding is a market-specific question. He says, “Weare developing a project in Boise, ID in which the past seven yearshave brought no deliveries of off-campus housing, versus otheruniversities that have had multiple projects delivered in the pastseveral years.”

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Ted Rollins, CEO of Campus Crest Communities, a Charlotte,NC-based student housing developer-operator, has a differentperspective on the overbuilding question. He sees the real story inthis industry as the transition from older product, which is mostlynon-purpose built, to purpose-built student housing “Our researchindicates that there is a meaningful backlog of demand for thepurpose-built product and that given the choice, the student willchoose this type of living experience,” he says. “So, we have ahigh degree of confidence that any oversupply is limited to somelocal markets and is not broadly an issue.”

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The Opportunities

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Rollins touched on one piece of the student housing opportunitypuzzle. But developers see opportunity across the board—and in manymarkets.

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“The student housing sector has performed better, on anoperational basis, than multifamily over the five-year period,”Bobilin says. “During the last downturn, student housing wasn'timmune to the effects but withstood the impact in greaterproportion than strictly conventional product.”

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Nelson sees opportunities split between tier-one universitiesthat have nominal growth but are providing higher-end, walkablecommunities that haven't previously existed and second- andthird-tier schools that are posting growth. Carter's Tetro StudentHousing Village near the University of Texas at San Antonio is agood example.

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“Over a 10-year period, the school grew about 40% and addedclose to 9,000 students,” Nelson says. “In years prior, the schoolwas commuter-driven, but during this growth, you saw the universityreinvest in itself by providing on-campus housing, new academicfacilities and a new fitness center. In addition, you saw a citygrowing around it. Student recruitment into jobs within the majormetro area is also picking up, helping to make the university anattractive location for students.”

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

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

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The Challenges

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Where there are opportunities there are always challenges, andthe student housing market is no different. Beyond potentialoverdevelopment, issues also arise from the quick develop-and-sellformula some companies in the space have pursued over the past fewyears.

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“Understand university growth and supply and demand, but let'snot become the next homebuilding sector of 2007,” Stark warns.“This is a management-intensive business, so the right people onthe ground are the key. You always have to be on the lookout forstandout for great people, be slow to hire and hire for talent,personality and drive. People first!”

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Indeed, student housing is operationally intensive. Studenthousing owners need solid operators. Rollins says it pays to befully vertically integrated. That's why Campus Crest controlseverything from the development company to the general contractorand supplier to the property manager as well as the assetmanager.

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“This creates a competitive advantage because our cost structureis better in each of the assets and it allows us to continuallyimprove the level of quality and service to the resident, whichresults in a stickier resident,” Rollins says. “We call thiscompounding knowledge and this is something we have done from thevery beginning. We use our operational experiences to continuallyupgrade both our product design as well as our operatingprotocol.”

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Unlike traditional multifamily, every year there is a high levelof turnover in student housing. Nelson points out that owners mayonly be renewing 30% of the project. That shortens the rentalcycle. The solution, again, is to partner with strong operators.But that challenge still scares many developers away from the nicheopportunity. “The investment requires oversight, because you aredealing with 18- to 23-year-olds,” Nelson says. “For years, manypeople stayed away from student housing projects until they saw howresilient they were during the economic downturn.”

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What Investors Really Want

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Even as student housing developments are getting underway,investors are snapping up existing product. So what do investorsreally want? Ultimately, returns and value. Student housing fitsthe bill as a stable investment serving institutions that have beenaround for decades—some even more than a century.

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“There are some new equity entrants into the space that arelooking to diversify from conventional multifamily,” says PeteBenedetto, a senior vice president with Horsham, PA-based thirdparty commercial mortgage servicer Berkadia Commercial Mortgage.“Student housing can often provide higher returns than conventionalmultifamily investments.”

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Student housing offers a spectrum of risk-return profiles, suchas university enrollment size, distance to campus, low- tohigh-cost provider, core versus value-add versus new development.Campus Evolution seeks a mix of these asset types, all withvalue-added components.

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“Anyone can look to execute upon a physical improvement programbut the rubber really meets the road through seizing upon turningaround under-managed properties,” Stark says. “It is hand-to-hand,day-in-day-out, and through that we can yield strong returns in arelatively risk-averse investment sector.”

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What's Coming Down the Pike?

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The student housing sector is benefiting from some of the samefactors as traditional multifamily housing: low interest rates andinvestors with plenty of capital to spend. As long as interestrates remain stable, most industry watchers don't expect any majordisruptions in student housing—notwithstanding any black swanevents.

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“One area we're watching is the ongoing increase in onlineclasses, which many public companies compare to the oldcorrespondent school phenomena in the 1950s,” Bobilin says. “Manyschools are adding online programs but it is more of an additionalrevenue generator than a business plan shift. However, we don'twant to discount the long-term effects of this on the marketplaceas it could prove similar to how Internet-based businesses havedisrupted longstanding bricks-and-mortar businesses.”

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Benedetto expects the student housing space to remain relativelystable. From a financing standpoint, he predicts CMBS lenders willcontinue providing a greater portion of the financing. “Before therecession, CMBS lenders were responsible for the vast majority ofstudent housing financing,” he says. “The GSEs and life companieswill likely continue to lend in the space, but we'll probably seethe most aggressive financing come from CMBS.”

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Stark has watched as public student housing companies pulledback on the acquisition spree—but he sees the public players comingback to the student housing market even if it's at a morerestrained pace and curbed appetite.

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“The latter part of 2013 and 2014 has seen some slowing inactivity and perhaps even some price expectations,” Stark says. “Wewere very active in 2013 in all-priced acquisitions and as thebid/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 developmentstarts to slow a bit.”

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