What's the Key to Student-Housing Success?

SAN DIEGO—Student housing is very management intensive, and it's very unforgiving for those who aren't prepared, DTZ's senior managing director Justin Glasgow tells GlobeSt.com. We spoke exclusively with Glasgow and several other student-housing experts about the most pressing issues the sector is facing. Stay tuned for a complete feature story about the student-housing sector in GlobeSt.com's sister publication Real Estate Forum.

GlobeSt.com: What should our readers know about this sector?

William Talbot, CIO, American Campus Communities: The student-housing sector is going through a dynamic period as the sector experiences the continued maturation and institutional acceptance of the space. During the '60s, '70s, '80s and early '90s, student housing was neglected by mainstream investors as not a desirable property type in which to invest based on incorrect stereotypes of an “animal house” tenant base and the incorrect belief that students and parents would not pay for quality product near campus. As a result, there was barely any modern student-housing product delivered to students during that period. By the mid-'90s, developers discovered the need for purpose-built off-campus student housing, and the market easily absorbed new developments due to pent-up demand and a lack of quality product available to them, which increased investor interest. The stability of cash flows became more evident after ACC became the first student-housing company to go public in 2004, and our investments further exhibited the strong demand through strong rental-rate growth and occupancies.

Student housing offers a unique investment with three distinct benefits. First, it is a great coupon-clipping opportunity through steady cash flow (or, in the case of ACC, through a consistent dividend). Over the past 10-and-a-half years of being a public company, ACC has never cut its dividend and has raised it twice in the last two years. Second, the sector offers an incredible growth opportunity given that the industry is in its infancy with decades of modernization still to take place due to lack of real investor interest until the mid-1990s. I can't think of another industry that offers that kind of opportunity. Lastly, while offering strong growth prospects, the sector also offers strong defensive and recession-resilient characteristics. This and best be demonstrated by the fact that ACC offers positive growth in same-store rental rate, rental revenue and NOI since going to public, even through the Great Recession.

Glasgow: Operators matter. This is an incredibly management-intensive asset class. Think apartment building meets hotel concierge desk with a clientele who has extremely high expectations and a propensity to use social media. It is very unforgiving for those who aren't prepared. Beyond operations, it's like everything else in real estate—location and proximity and a connection to campus are critical. Closer is generally better, but assets that may be slightly farther away can still do well if they provide a sense of community to the residents and tie to the college or university in some way.

The amount of capital allocated to real estate in general and the relative safety of the US have driven a multitude of investors to US real estate. Regulatory changes abroad and a relatively good macroeconomic and employment environment in the US have foreign investors looking for ways to get involved in asset classes that have better risk-adjusted returns than the traditional four property types—office, residential, retail and industrial. Student housing is a natural fit.

Brian Dinerstein, president of the Dinerstein Cos.: Student housing is exciting, dynamic and very difficult. Each market and submarket is different—just because students lease in October and November in Ann Arbor does not mean that they will do so in Charleston. Another interesting component of student housing is the importance of your brand. Due to the fact that your residents are friends with one another as well as the impact of social media, your student-housing brand is critical and can lead to outperforming—or underperforming—a market by 10% to 15%.

Wes Rogers, president & CEO, Landmark Properties: Student housing is a vibrant sector with plenty of opportunity given the attractive risk-adjusted returns. There are a lot of differences between student housing and conventional apartments, though, so align yourself with a partner that is experienced in the space. Most of the bad deals I've seen have been due to new entrants building projects they shouldn't have built.

David Nelson, SVP for CRE investment firm Carter's student-housing investment: The student-housing class showed relatively well during the downturn, motivating investors and developers to focus heavily on the sector. However, the large pipeline of projects, rigorous timeline for building and intensive management demands has caused some to think twice in recent years, diminishing the development pipeline from its peak of more than 60,000 beds. The boom in student housing and multifamily construction has also stressed the labor and materials markets, causing pricing increases and downward yield pressure. Investors are now looking more than ever to seasoned developers to minimize the downside risk and ultimately help meet return expectations and development timelines.

Despite a recent decrease in the pipeline and positive news in the market, we have seen investor appetite for student-housing projects in 2015 increase over the last year. With that said, due diligence is becoming more and more important. Instead of looking at the sector as a while, investors are becoming more selective about which projects and markets are good long-term investments and which sponsors are right with which to partner. Targeting specific properties and/or locations for student-housing projects before entering the market is the rule, not the exception.

From management, service and design standpoints, purpose-built student housing has proved that it caters to the needs of students and the surrounding communities. The next five to 10 years has the potential to serve as a runway for growth opportunities in the student-housing sector, specifically in target markets with thriving colleges and universities.