As the industry heads into the fourth quarter, investment sales brokers are anticipating a strong finish to what has been an active year in student housing acquisitions.
While many properties listed at the end of 2013 had not closed by year’s end, brokers are expecting a different outcome this year as plenty of capital is surrounding the sector with a strong appetite for projects that are close-to-campus, value-add and relatively new developments.
According to Dorothy Jackman, managing director of Colliers International’s Student Housing Group, the combination of class-leading student housing developers and strong capital players are creating higher quality projects and opportunities for acquirers. “There is still a strong demand for the asset class in terms of acquisitions, with core, Class A, close-to-campus, urban in-fill and value-add plays being the most sought-after products,” Jackman says. “Joint ventures and synergistic relationships among managers, developers and equity are being formed, bringing best-in-class providers together on both developments and acquisitions.”
Many student-housing funds that have been in fundraising mode over the past year are now ready to put their money to work in investments, says Jaclyn Fitts, Associate Director of Investment Properties, Student Housing for CBRE. “Value-add properties are in high demand with investors,” Fitts notes.
American Campus Communities and EdR are examples of firms only buying/building Class-A, pedestrian-to-campus assets. This has helped drive the cap rates for that product type way down, according to Isaac Sitt, Co-Founder and Co-CEO of Vesper Holdings, a privately-held, New York-based real estate investment firm.
“The market is very strong in general for quality assets, even if they are not pedestrian-to-campus,” he notes. “There are opportunities to be found, but they are few and far between because cap rates are just so low.” According to a report by CBRE, $2.9 billion in student housing transactions closed during 2013, and leading brokers anticipate similar volume in 2014, with the majority of transactions occurring during the second half of the year as product is delivered and lease-up is completed.
American Campus Communities (ACC), the nation’s largest developer, owner and manager of student housing communities, reports that cap rates today remain consistent with previous years, with core pedestrian product serving Tier 1 universities at cap rates between 5 percent and 5.5 percent. Other Tier 1 properties are between 6 percent and 6.5 percent, and properties in tertiary markets are trading above 7 percent.
While the prevailing industry trend has been the development of core, infill, pedestrian-to-campus locations, which offer premium valuations, some developers are underwriting aggressive pro forma rents that are at a significant premium to actual market rents, according to William Talbot, executive vice president of investments for ACC.
“In many cases, these pro forma rents are not achievable, and these assets will stabilize at proven market rents,” he notes. “Buyers who underwrite actual market rents will see their returns materialize, while those who underwrite and execute on transactions on fictitious pro forma rents will not.”
Ryan Tobias, founding partner at Triad Real Estate Partners, a Midwest real estate brokerage company, believes there’s been a shift in the student housing landscape, and that overall sales volume has been down in the first half of 2014.
“A lot of that has to do with the REITs backing off, especially with the big portfolio acquisitions,” he notes. “Development has only increased, but more developers are holding longer. The private market is still very active but obviously the REITs are the biggest players, and they have a huge effect on the overall market.”
The Dominant Players
While the REITs still are the largest factors in terms of moving the investment needle, new private equity players are entering or trying to enter the student housing space every day, according to Sitt. “The space has performed very well and received a lot of positive press, which has led to more buyers than ever before for quality student-housing assets,” Sitt says. “Right now, the dominant buyers are the well-funded private equity players who know the ins and outs of the business and are attracted to the higher yields relative to standard multifamily.”
The student-housing REITs, after sitting out since last year, have finally indicated they will begin to target select acquisitions, according to Fitts. “The first half of the year was dominated by private investors with 78 percent of the transactions, which is driven by value-add deals that typically trade in the first two quarters,” she says. “There has also been interest from foreign investors.”
Jackman agrees that more investors are entering the space, but they are most often engaged with a group that has experience. “Newcomer developers are reaching out to management companies for advice, as well as equity providers for input on developments,” she notes. “There is also a growing desire to line up your exit during construction of a new project, and have it sold upon COOs and at an occupancy rate that has been pre-determined.”
Areas of Demand
Areas of high growth with increasing enrollments and significant new development are seeing the most attention right now, according to Tobias. Those areas include the Southeast, Southwest (primarily Texas) and the Pacific Northwest. Sitt agrees. “Those states/cities have the highest projected growth of high-school graduates over the next decade,” he says.
He also says that Class-A, pedestrian-to-campus assets are in vogue right now because that’s where the REITs are investing their money. “With all the new development out there, their feeling is that the only way they can protect the long-term value of their properties is by offering superior location to any future competitor. While this has some truth to it, our feeling is that if you buy the right assets at the right price, they will maintain their value even when there is new development.”
There has also been a larger influx of value-add properties to hit the market recently, as well as smaller portfolios, according to Fitts. “These value-add properties are in high demand primarily by private investors and funds, while the new construction deals are sought after by funds, institutions, REITs and private investors,” she notes.
These larger, value-add opportunities are typically at Tier 1 universities, though there are opportunities to be had at Tier 2 and 3 universities in areas of high growth and in the Sun Belt, says Tobias. “In the Midwest, however, this means properties with 300 or more beds at Big Ten universities and a few major private schools,” he adds.
Campus Evolution Villages tends to look for opportunities where others may not be. CEO Andrew Stark says the company likes off-market transactions in the markets with less inventory. “We can bring our brand of management and attention to the student experience to the forefront in these markets,” Stark notes.
Student housing investment for 2014 is a hotbed of activity as compared to previous years. CBRE has transacted 13 deals year-to-date and has another 15 under contract or awarded. In CBRE’s mid-year analysis, the company saw more transactions in the first half of 2014 than previously seen for the same time period in 2012 and 2013. In 2013, American Campus closed four transactions totaling 2,392 beds and 111,000 square feet of retail for a total of $237 million. The four properties averaged 0.1 miles to Tier 1 university campuses with an average age of three years. They include Cardinal Towne, a 545-bed property at University of Louisville; U Centre at Fry Street with 614 beds at University of North Texas; Seventh St. Station, a 309-bed property at Oregon State University; and Park Point RIT with 924 beds at Rochester Institute of Technology. The company has been focused on its core infill development pipeline, such as Chestnut Square in Philadelphia, and not completed any acquisitions in 2014 year-to-date; however, the majority of transactions in 2013 occurred during the second half of the year, as fall deliveries were completed and rent rolls were solidified for the academic year.
Last year, Vesper Holdings, which regularly buys both stabilized and value-add assets, acquired three assets in Athens, Georgia; Huntsville, Texas; and Harrisonburg, Virginia (with a major renovation currently under way), for a total of 2,000 beds. The company also has contracts to close on two large, Class-A deals, totaling 1,600 beds, at growth schools in the Southern U.S, one of which is a new core stabilized asset about a mile from campus.
“In this case, we are buying into our belief in a specific university market, and do not have major plans to change the dynamics of the asset,” explains Sitt. “The other asset is 13 years old, and we see a major opportunity to drive rent growth by executing drastic capital improvements to the amenities, grounds and units. We are also planning a major rebranding and repositioning effort for the property.”
Colliers International had 38 recorded student housing transactions in Tier 1 markets during the first half of 2014, totaling approximately $495 million in transaction volume, and 18 student housing properties in Tier 2 and 3 markets with a reported $238 million in total transaction value.
The Colliers International Student Housing group closed the sale of The Courtyards in Gainesville, a student housing property located directly across the street from the University of Florida campus, for $18 million. The 110,597-square-foot, gated student housing community has 91 units and 375 beds. A student housing developer purchased the complex with plans for redevelopment and renovation to include a mixed-use component with retail, podium garage and additional purpose-built student housing units.
Colliers International has also closed the sale of The Landing Apartments for $33.5 million, signifying the demand for value-add student housing communities with opportunities for buyers to make improvements and renovations. The 319,296-square-foot student-housing complex is located near East Carolina University and Pitt Community College. With 288 units and 888 beds, The Landing is a gated community with access to the ECU bus system for transportation to campus. Triad Real Estate Partners expects to sell well over $100 million in student housing assets this year, up significantly from last year. The company has also sold a couple of particularly challenging projects in the Midwest, according to Tobias. The first was a two-property portfolio, called Darby Row & The Belfry, located within walking distance of the University of Notre Dame.
“The challenge here was mainly size, just 71 beds between the two projects,” he notes. “We had local interest but not at the aggressive cap rate we were looking for. We eventually sourced a California TIC buyer who was sold on the locations and the high barriers to entry at a premier research university.” The second sale for Triad was a Class-A, mixed-use project in “the best” location at Illinois State University. The property had just 210 beds and a significant amount of commercial space, nearly 50 percent of the income, according to Tobias.
“After extensive marketing, we sourced a private overseas buyer who was able to get comfortable with the commercial, mainly due to the premier location,” he says. “The property is set to close later this year with pricing at nearly 99 percent of asking.”
With the amount of product hitting the market and the number of pending transactions, it looks as though 2014 sales volume will surpass that achieved in 2013, according to CBRE. And with the student housing population still growing, the future for off-campus housing seems vibrant. There is still strong demand for the product, and there are still many markets that are underserved, and therefore, many opportunities, says Jackman.
“As always, everyone is keeping their eyes on the needle for interest rates; by and large, we’re expecting rates to remain low in the short-term, but it’s always a best guess, Jackman adds. Those investors with a low cost of capital are going to continue to pursue deals and deploy as much capital as possible during this low interest rate environment.” Triad Real Estate Partners predicts that development will continue at a torrid pace, as the pipeline for 2015 and 2016 deliveries is very strong, but expects to see new proposals for developments start to taper.
“We see a greater demand for studios and so-called ‘micro units,’ and I think developers will respond to that in urban areas where it makes sense,” says Tobias. “On the investment side, private capital will continue to be strong, and we expect to see public investment increase toward the end of the year and going into 2015. If interest rates remain low, 2015 sales volume should be up from the trough of 2014 with CAP rates remaining relatively level.”
But Sitt says that interest rates should begin to rise in 2015, at which point there will be a lull in the marketplace as the bid/ask spread will widen between buyers and sellers. Another potential hurdle is continued upward pressure on construction costs and infill land prices, which may cause developers to underwrite significant premiums to rent to obtain their required return hurdles. The market may not be willing to pay those premiums,” according to Talbot.
“ACC’s development model focuses on premium locations, but through strategic approach to design, unit mix and construction, we are able to develop projects that are a value proposition to the existing market, not a significant premium that may not be justified.” While certain markets have become or will become overbuilt, capital flow will hinge on the REITs and their capital deployment going into 2015, Tobias adds.
“Stock prices have risen throughout the year which could lead to additional spending. We’ve seen very little cross-border investment in the space recently, although our anecdotal experience seems to indicate that this may be on the rise.”
— Susan Fishman