Austin, Texas — Moving toward the start of a fresh academic year, the outlook for the student housing industry keeps getting brighter. A testament to the industry’s movement out of the pandemic is taking place at the InterFace Student Housing conference in Austin, where nearly 1,300 attendees have been able to gather in-person for the first time since April 2019. This year’s event, which concludes tomorrow morning, is taking place at the JW Marriott downtown.
The student housing sector banded together like never before in the face of COVID-19 and truly worked as a team throughout the pandemic, with the ultimate goal of keeping students as safe as possible.
The sector’s resilience during the pandemic and optimism regarding the year ahead were the driving discussion points during the conference’s “Power Panel” on Wednesday, July 14, which brought together a consortium of high-level executives to discuss industry trends, their experiences with COVID-19 and the outlook for the upcoming academic year.
“The past 18 months have been a whirlwind of uncertainty,” began moderator Peter Katz, executive director at Institutional Property Advisors, a division of Marcus & Millichap. “While our sector has been historically categorized as recession-resilient, we would all now claim it to be pandemic-resistant.”
“Student housing continues to demonstrate its risk-adjusted returns as an asset class and clearly did so through the pandemic,” Katz continued. “This phenomenon only solidified interest in the sector from both domestic and international investors alike.”
The investment community is experiencing cap rate compression moving out of the pandemic, and while the total transactional volume for 2020 was slowed by COVID-19, Katz predicted a return to normal levels by the end of 2021.
“The sector is on the cusp of exploding,” he said. “We are projecting closings for the 2021 calendar year to total between $7.5 billion and $8 billion — we are returning to where we belong as an industry.”
‘Debunking the headlines’
Discussion continued with a focus on the sector’s experience at the start of the pandemic.
“From an industry perspective, there has been a lot of headline risk throughout the pandemic that did not match with the sector’s performance,” said Marc Lifshin, founder and CEO of Core Spaces.
Lifshin said the negative press was largely based in tertiary student housing markets, which is deceiving as most of the sector’s heavyweights like Core Spaces invest and develop in “tier one markets.”
“If you look specifically at our portfolio or any of the portfolios up here, our investors and our limited partners had student housing properties in their portfolio outperforming the majority of other asset classes, if not all other asset classes,” said Lifshin.
Core Spaces saw 95.5 percent occupancy, 99 percent rent collections and 2 percent rent growth in 2020 — levels which suggest that some of the doom and gloom headlines in the thick of the pandemic might not have been indicative of the true experience within the sector.
“We’ve also been focused on debunking the headlines,” agreed Cliff Chandler, senior managing director of investments at Greystar. “The levels we were seeing in our portfolio were contradictory to what we were reading in The Wall Street Journal, and we spent a lot of time educating our current and potential investors accordingly.”
The pandemic’s impact on development was another major topic of discussion. Wes Rogers, president and CEO of Landmark Properties, said the current atmosphere is night and day compared to spring and summer 2020, which were a pretty scary time for his firm with so much uncertainty in the marketplace.
“We had several capital partners who got spooked and wanted to delay a few projects,” said Rogers. “Fortunately, we had really good relationships with our lenders and some of our equity partners and we plowed through on most of our projects. We did have a few deals that slipped into the fall, but every deal that we were working on prior to COVID-19 ultimately has been capitalized.”
Rogers said that Landmark Properties has more under construction currently than it’s ever had in the company’s history.
“Capital has absolutely flooded into the sector, both in terms of development and acquisitions,” he said. “We’ve started over $2 billion in construction since the beginning of the pandemic so we have about $3.5 billion in the ground today across the U.S.”
Back to school
Many universities have returned to 100 percent in-classroom learning, while others have retained a flexible program, allowing students to take a hybrid course load of online and in-person classes. A decline in occupancy was seen in some markets due to a combination of restrictive university protocols as well as international student visas and the inability to secure them.
Moving into the new academic year, the panel expects that students will want to be in their college market regardless of the adopted mode of learning.
“The reality is that not only did students vote with their wallets and demonstrate a priority toward being in their physical campus environments over going to school virtually from home — and that was irrespective of the learning protocols at their universities across the country — but we also really saw the benefit of the parental guarantors that drove collections activity, which literally mirrored pre-pandemic times,” said Avi Lewittes, chief investment officer of The Scion Group.
Blessing in disguise?
Rogers expects to see a lot of transactional activity in the second half of the year, and posited that the student housing sector may ultimately be a beneficiary of the COVID-19 pandemic.
“Cap rates are looking to be in that 4 to 4.5 percent range, which is the lowest we’ve ever seen, but candidly, we still have some runway given the risk-adjusted returns that investors can get,” he said. “At the end of the day, COVID-19 is going to be a net-positive for our sector just given the relative outperformance of the space.”
“Coming out of the pandemic, COVID-19 is going to be ultimately beneficial due to everything we were able to prove as a sector — we are absolutely recession-resilient with extremely durable cash flows in times of dislocation,” agreed Chandler. “No matter the modality of learning, students want to come back to campus and want to live in off-campus buildings and that has been proven through our occupancy rates, which are in the high 90s. Our industry is just so resilient — throw in a global pandemic, and we’re still going to stable as an asset class.”
— Katie Sloan
Check back on the Student Housing Business website next week for more conference coverage.