Student Housing Doing Well, But Look Below the Surface

PHOENIX-According to speakers at this year’s National Multi Housing Council’s Student Housing Conference and Exhibition, investing in, taking over or even building student housing is a good-news, not-so-good news scenario.

The good news? Student housing continues to be a strong and resilient sector, despite the beating other real estate sectors are taking. All the speakers at the first panel of the day, “State of the Industry with Student Housing Leaders” were upbeat, claiming increased NOIs, rated rents and occupancies across their portfolios from the year before.

Furthermore, student housing will likely continue to do very well in the near term. Bill Bayless, president and CEO of American Campus Communities, noted during the “State of the Industry” panel that as colleges and universities continue to dedicate more resources toward their core competencies, there is more opportunity for public-private partnerships as these institutes of higher education outsource everything from books to facilities management to development.

Added to this great news, Andrew McCulloch, senior analyst with Green Street Advisors Inc., said Wall Street and its investors have done a complete turnaround about their concerns over investing in student housing REITs.  Lenders have also embraced the product, he noted, adding that “the sector has arrived.”

Then what, in this rosy scenario, is the not-so-good news? Well, for one thing, states, in efforts to cut back on expenditures as they strive for a balanced budget, are giving less and less to state-funded colleges and universities. Harley T. Duncan, managing director, state and local tax, KMPG LLP pointed out that states feeling a budget squeeze and finding more demands on scarcer resources are likely going to cut back on financing state colleges and universities, meaning tuition is likely to increase. Though less funding to state educational institutions will provide more outsourcing opportunities to student housing developers, higher price points could put a damper on enrollment, and could drive students to other alternatives such as community colleges, Duncan added.  

Perhaps more importantly, during the panel “On-Campus Development: Will it Affect Off-Campus Housing and Are There Enough Rewards for the Risk” it was made abundantly clear that student housing is not for the faint-of-heart. The panelists acknowledged that there are a lot of Request for Bids and Request for Quotes floating around out there from universities and colleges for facility and housing development. However, as “schools have become experts when it comes to design/build,” commented Greg Blais, Ambling University Development Group’s President somewhat wryly, it can be difficult to go against that belief. Added to that, Blais continued, is the university revolving door – if one president has approved a particular deal or development, if that president departs, his or her successor may not be as enthusiastic.  

All the “On-Campus Development” panelists said working with a school or university means working with a lot of stakeholders, not all of whom might be in agreement with one another. Then there is the reality check. “If you’re talking about needs and feasibility and the reaction is ‘huh?’ that’s a bad sign,” said Jamie Wilhelm, executive vice president, public-private partnerships, American Campus Communities. “You can’t get bogged down in a project that won’t close.”

Finally, investing, as a whole, is getting a little more dicey. Peter Stelian, managing principal, Blue Vista Capital Management noted in the “State of the Industry” panel that investors are becoming more cash-on-cash as opposed to expectation of growth. Added to that, “more investors are on flights to so-called ‘recession-proof’ activities, added Jared Schenk, Schenk Realty Group LLC’s principal in the same panel discussion.

But isn’t student housing supposed to be recession-proof? It can be – but Randy Churchey, president and CEO of Educational Realty Trust remarked that supply side issues concern him. Rising tuition, he pointed out, will mean demand won’t go up. Though he acknowledges that fewer beds are being delivered to market, “supply side keeps me up,” he adds.

Schenk also acknowledged the potential problem of oversupply – not to mention what the actual demand for housing will be. “Enrollment is our Achilles heel,” he acknowledged, adding that students have different tastes when it comes to housing, including how close to campus, whether new is preferred to old, and so on.

Then there is the issue of financing, whether the activity involves acquisition or development.  The “State of the Industry” panelists agreed that agency money, such as that obtained from Fannie Mae or Freddie Mac, is demanding strong sponsorship expertise. Then there are the out-of-country funds, which also bear some scrutiny.

“There isn’t a week that goes buy we don’t hear from some kind of capital source from out of the country,” notes Campus Apartments’ President and CEO David Edelman. “There are a lot of funds I haven’t heard of before.” The question isn’t necessarily whether these foreign funds can afford the assets, but rather, are they experienced in operating student housing.

What is the take-away from day one of the conference? First, student housing is doing very well. Second, not everyone is equipped to do well in this market. And three, because of rising tuition costs and falling state funding, tuitions are likely going to rise, meaning over the next several years, students could select other options for their education, such as community colleges or other non-traditional methods. This, in turn, will mean an interesting shift in student housing.