Andrew Layton: The Wild World of Student Housing

It is wild to think that 24 months ago I was sitting in the same room that I am sitting in now thinking whether my lifelong dream of building a company was ending abruptly. In March 2020, my colleagues at Student Quarters and I were celebrating the imminent closing of a deal at the University of Cincinnati. Our pipeline had never been stronger or deeper. We were poised to make our move to become an industry powerhouse. And then over the days, weeks and months that followed, we spent hours on endless conference calls and Zoom meetings wondering how we were going to survive. 

The industry, however, did not crater. The world did not come to an end. In fact, like the Phoenix rising from the ashes, student housing was surging forward. By August 2020, our team was fully back in the office plotting our next moves. 

All of a sudden, the financial and real estate world retrenched, and all eyes were on the miracle story of student housing. The Pollyannas who swore that virtual learning would push traditional college learning into extinction were eating a crow sandwich with extra barbeque sauce. The titans of finance took notice, and the small insular world of student housing has forever changed.  

Five years ago, there were a handful of international players in the U.S. student housing market, and the Goliaths of domestic private equity were sitting on the sidelines watching. Today, capital is flooding into the space from every corner of the globe. My team is on the phone seemingly every hour of the day with investors from Australia, Asia, the Middle East, Europe — and the United States. Currency trading desks on Wall Street have nothing on student housing companies when it comes to the 24-hour business cycle. As Gordon Gekko famously said in Wall Street: “Money never sleeps!!”

I know that we at Student Quarters are not alone. Take one look at the players in the space right now and it is a ‘who’s who’ of business: Goldman Sachs, Blackstone, KKR, Fortress, Angelo Gordon, and so many more. Every major deal that goes out is the equivalent of a Dana White-promoted UFC title card. Jorge Masvidal, Connor McGregor, Kamaru Usman — who needs them. 

The aggression in dealmaking is unlike any period of time before in this industry. Access agreements were rarely encountered in 2020. Now they are omnipresent. Shortened due diligence periods? An absolute must. Hard money up-front? No longer taboo. And now our brethren in conventional multifamily are creeping into deals and trying to move into the space. We are seeing cap rate compression. Like piranhas in the Amazon seeing blood in the water, student housing combatants are willing to do just about anything to win.

When I started in this industry back in 2008, everyone knew everyone. The battles were fierce but amicable. Not anymore.

With all of the pressure to “win” deals comes the realization that getting deals over the finish line has never been more challenging. Third-party providers are at their limits and reports simply cannot be processed in the time parameters that buyers tell sellers they need “to win the deal.” 

Deals are being launched into the marketplace prematurely in an attempt to capitalize on the frenzy. Things simply are not as buttoned up as they used to be. This has led to countless deals that were rushed into the marketplace only to go immediately sideways once awarded. 

And this does not even consider current volatility in the debt markets. The industry became complacent with relatively stable interest rates over the past several years. Not so today. We have seen swings in interest rates of 70 to 100 basis points over a short period of time. You underwrite a deal and arrive at a valuation using one rate, only to get through PSA negotiations and due diligence to find that what you underwrote is not even close to reflecting current market conditions. 

So as the titans enter the ring for the 2022 Interface Student Housing conference in Austin, where is the industry headed next? In a nutshell, it starts with industry consolidation. Just as my constitutional law professor told me in 1990: “Look to the person sitting to your right; now look at the person sitting to your left. One of the two will not be here when you graduate.” Over the next two years, I expect many of the players on the SHB Top 25 Owners list to be acquired. We are involved in a race for scale. With all these goliaths now in the space, there is no longer room at the table for the pesky underdog and or the successful mid-major. Scale gets you better capital partners with deeper pockets. Scale gets you better financing terms. Scale gets you invited to the secret offerings that we all know exist but never publicly discuss. How do you get scale….get a deep-pocketed financial partner and act like Pac-Man. Mark my words, by May 2024, there will be at most eight to 10 competitors left. It truly is survival of the fittest.

Who gets impacted by a dwindling number of operators? The days of independent third-party management are about to go the way of radio and black and white television. Large operators know that the true way to get alignment between ownership and property management is to bring it in-house. I anticipate the large-scale management companies will be absorbed by those remaining players needing management expertise.

The ultimate end game though does not end at the shores of the Atlantic and Pacific Oceans. Student housing is now a global game. The ultimate survivors will need to have a global strategy to achieve scale. It is no longer good enough to be merely domestically oriented. With global capital comes global aspirations for global hegemony. U.K., Canada, Continental Europe, Australia, Asia are all in play. Get ready, the battle is about ready to begin for real. As ring announcer Michael Buffer says: “Let’s get ready to rumble!!!”SHB 

— Andrew Layton is the chief acquisition officer for Student Quarters.