In Student Housing, 'The Buyer Pool is Deeper'

AUSTIN, TX—With a strategy that focuses on recession-resilient commercial real estate segments, private equity firm Virtus Real Estate Capital has been active in student housing for more than a decade. The past few years have seen many more potential buyers and developers come onto the playing field, a trend that locally based Virtus' Kevin White counts as both a challenge and a boon for the student housing sector as a whole. GlobeSt.com caught up with White, the firm's director of acquisitions for alternative multifamily, to get his take on the state of the market.

GlobeSt.com: What's your view of the outlook for student housing fundamentals this year?

Kevin White: We're one of the largest private equity companies in student housing; we've been in it for a number of years and seen several leasing cycles. This most recent leasing period, the fall of 2014, was very important for the entire industry because there were a lot of discussions about potential oversupply, and supply and demand being out of balance. Almost unanimously, owners and operators have said they saw the best lease-ups in the history of their portfolios. This settled the concerns of a lot of potential investors that the industry was potentially overbuilt.

That's not to say that there aren't individual markets across the country that are overbuilt, but the good news is that the 2014-15 academic year was not an anomaly. We're actually tracking 10 percentage points ahead of where we were the previous year.

We've been very careful to pick our spots in the industry, trying to pick markets where we believe in their long-term enrollment sustainability and growth. We also look for barriers to entry, so we don't wake up one fall and find that that our supply and demand has been flipped on its head because developers decided to build two or three projects at one site.

GlobeSt.com: There have been reports that the development cycle is slowing down and there won't be quite as many deliveries for the next academic year. Is this what you're seeing?

White: Yes, and there are several reasons for that. Number one, in previous years there had been so many new projects built that a lot of the high-quality land sites next to major universities had been purchased and filled. There just aren't as many sites available in great locations as there were five or six years ago.

Secondly, there's been a significant increase in construction costs over the past couple of years. Land costs have increased, but construction costs have increased faster. This has really squeezed the spreads, because rental growth has not kept pace. A few years ago, we were looking at a new development that had an 8% yield on costs. Today, you're probably looking at a 7% to 7.25% yield. Third, equity has pulled back a little bit on development because of these things, and has remained disciplined about the projects they choose to fund, given the concerns about the spread between yields on cost and exit caps.

GlobeSt.com: Talk about how differentiation among product influences its appeal to investors.

White: One of the areas we've become more in tune with is really understanding how a property fits into a market and what the dynamics are within each market. You may have a market where being next to campus is the number one priority, but you have other markets where it's not as big a priority. Maybe the campus is more spread out, or the climate or topography keeps students from walking, or maybe it's very easy to park on campus and it's more convenient for students to drive to campus.

Amenities are certainly something we think through when choosing a project. But the amenity package is very different market to market. On a Midwest campus, having a resort-style swimming pool is not nearly as important as it is in Texas, where they can use the pool more than just between Memorial Day and Labor Day, when the majority of them wouldn't be at your property anyway. On a lot of the value-add acquisitions that we do, we've looked at repurposing a lot of the unused amenity spaces.

GlobeSt.com: Let's talk about differentiation among investors. Are you working with a pretty broad spectrum of potential buyers?

White: Yes, the buyer pool has certainly deepened. Long term, it's great for the industry. It makes it more challenging for us to find good projects at pricing that makes sense, but it also makes the industry more viable, and more institutional. We have groups like us, Starwood, Harrison Street, the REITs and others that are all looking at the space, in addition to groups that are backed by family offices and pension funds. It runs the gamut of who's buying in the industry. That's been something new over the past four or five years. It used to be us and a handful of other groups that were out there pounding the pavement, trying to find deals. Now the buyer pool is deeper; that provides liquidity and attracts more institutional groups to look at the space.