What's Changed in Student Housing?

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“The student-housing business today is unrecognizable from when we started in it in 1997,” Brian Dinerstein, president of the Dinerstein Cos., tells Real Estate Forum. “Sixty-four deals and 37,000 beds later, we are just now getting the hang of it!”

For one thing, the breadth of investors for this property sector has broadened considerably, and experts recently told Forum's sister publication, GlobeSt.com, that the buyer pool for student housing is deeper than ever. Kevin White, director of acquisitions for Virtus Real Estate, counts this as both a challenge and a boon for the student housing sector as a whole. “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.

According to William Talbot, CIO of 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. Around the mid-'90s, “institutional capital began to flow into the sector, and that trend continues today, with many new high-profile investors continuing to enter the sector in the last 12 months. The increased demand has led to compression in cap-rate spreads relative to conventional multifamily, with CBRE recently reporting that student-housing cap rates have been reduced to only a 13-bps premium over multifamily.”

Justin Glasgow, senior managing director for DTZ, says that from his vantage point, the most significant change in the sector is the level of sophistication of many of the operators he interacts with and the amount and the different types of capital looking at student housing. “I'm focused on helping real estate companies grow, and I do that by matching opportunities with the right capital—both equity and debt.”

Development is also getting smarter, J. Wesley Rogers, president and CEO of Landmark Properties, tells Forum. “You are not seeing the overbuilding that you saw in the last cycle since most of the development is happening at schools that have a real need.”

In addition, college students are putting a premium on living close to or adjacent to campus, and developers and owners have begun to search for ways to meet this demand, relates David Nelson, SVP for CRE investment firm Carter's student-housing investment. “There has also been noticeable growth in markets that have not historically been focused on the student-housing sector. High-density, purpose-built student housing has evolved to replace the current stock of multifamily and converted units in many mid-sized cities such as Boise, ID; Chattanooga, TN; and others. A relatively high growth rate in many Western markets and mid-sized universities around the country has only helped to strengthen this trend.”

Rogers says developers and their capital partners have learned from the mistakes of the last cycle and are generally developing the right product in the right location in the right markets. “As evidence, Axiometrics is projecting roughly 25% fewer construction deliveries in 2015 than last year—at a pace that is less than enrollment growth.”

SHIFTING EXPECTATIONS

Expectations in design have also changed significantly, and Dinerstein says the bar continues to get raised in terms of size, complexity and “bells and whistles” for student housing. “Originally, our first-generation-student product quality was similar to class-B conventional apartments. Today, our student deals are as cutting-edge, modern and environmentally sustainable as any of our class-A multifamily developments (our other line of business).”

In the last cycle, most of the development consisted of garden-style communities three to five miles from campus, says Rogers. “There's a lot more pedestrian, urban-infill development taking place today, though. The challenge with these deals is that they are more expensive to build, so they almost always target the upper end of the market.”

Nelson points out that developments are trending toward smaller projects rather than 1,500-bed mega-developments, which are better candidates to fit at a prime location adjacent to campus, avoid zoning issues and increase operational efficiency. Glasgow adds that the design is more and more focused on the overall experience of the student within the college community. “In conventional multifamily, it is often referred to as 'live/work/play,' and I see that same consideration playing into student-housing design. Each project is different, but offering design and amenities that provide a sense of community and allow students to be integrated into the university experience and with how they live is a story that resonates with investors.”

In addition, units are getting both bigger and smaller, says Dinerstein. “In other words, we are building more one-bedrooms and efficiencies and more five bedrooms. As for the common areas, they continue to improve on each and every job.”

There is also an increased focus on privacy for the resident, says Talbot. “Unlike traditional residence halls where roommates are staring at the other person in the bed, there has been a move to private bed-and-bathroom accommodations for each resident.”

Talbot has also seen a real movement to academically oriented amenities within his firm's communities. “Students now really value ample study rooms throughout the community, along with community meeting space and large computer labs.” He adds that his firm has also seen the continued evolution of technology within its student-housing communities.

“College students are some of the most technologically savvy consumers, and they rely on technology for their academic mission as well as social interaction and as their primary source of entertainment (over cable TV),” he continues. “Our communities almost always provide bulk Internet as part of basic rent, and we have to provide superior Internet services to support resident demands.”