Investment sales in the student housing industry had an interesting 2020. After a promising start, the industry hit the pause button when the COVID-19 pandemic hit at the end of the first quarter.
“Understandably, investors paused when COVID hit as there was no way to know the depth of its impact on student housing,” says Kevin Larimer, senior managing director of student housing at Berkadia. Now, as universities make plans for fall 2021, sellers are readying properties for sale by ensuring they are well leased and positioned to go on the market. With two large portfolios closing at the end of 2020, many in the industry have strong prospects for student housing investment sales in 2021 provided today’s headwinds in the market continue to dissipate.
Fourth Quarter 2020
As 2020 moved forward, many student housing operators got to a point where they had clarity on collections, which were consistently above 90 percent. Results from the fall leasing season were also largely positive, boosting investor and owner confidence.
“The data was hugely positive as overall occupancy was between 88 percent and 89 percent, rent growth was 1.5 percent to 1.7 percent and collections were outperforming conventional multifamily,” says Larimer. “While the data did show COVID had a clear impact on student housing operations, the level of disruption was limited and provided further proof to the resiliency of the student housing sector. Astute and nimble investors took notice and started to pursue opportunities even while overall investment demand was muted.”
By the fourth quarter — typically the strongest for student housing sales — capital was back readily flowing through the sector and investors were out seeking properties. While the fourth quarter of 2020 will likely reflect lower sales volume than past years, there was a marked uptick from the second and third quarters.
“While it certainly will be dramatically higher than Q2 and Q3, the fourth quarter will still fall far short of typical Q4 volume for student housing,” says Fred Pierce, president and CEO of Pierce Education Properties.
As Q4 continued, investors began to see some thaw in the transaction market as well, as properties came to market with strong fundamentals.
“In August, the investment community started to realize that regardless of the pandemic and virtual learning, students wanted to be back on campus,” says JD Goering, senior vice president of acquisitions at Athens, Georgia-based Landmark Properties. “Purpose-built, privately-owned off-campus housing was viewed by many as the safest housing option for students to live and learn during the pandemic. This realization led investors to become much more comfortable pursuing the asset class during otherwise uncertain times.”
Many in the industry noticed a trend about some properties that were on the market during the first and early part of the second quarters.
“The first three quarters of the year were as anemic as they could be, and rightfully so,” says Andrew Stark, principal of Timberline Real Estate Ventures. “There was enhanced hesitation by some sellers that COVID was going to severely impact our sector. Collections and leasing, however, came back stronger than expected. We saw a lot of deals in the first and second quarter come around again in the fourth quarter.”
The largest deal to close was the sale of the University Communities portfolio to London-based GSA. The 27-property portfolio of mostly pedestrian assets boosted sales volume for the year, and was the largest portfolio traded in 2020. [For more information, please see our SHB Interview with GSA CEO Will Rowson on page 26]. The other larger deal to sell in the fourth quarter was the Preferred Apartment Communities student housing portfolio that was purchased by TPG Real Estate for $478.7 million.
The fourth quarter of 2020 was also a time for catch-up for many investors in the industry, who had to work through COVID-related setbacks on closings originally scheduled for earlier in the year.
“A lot of deals that would have closed in the second and third quarters were delayed while the industry and the financial markets got their arms around the ramifications of the pandemic,” says Andrew Layton, chief acquisition officer of Atlanta-based Student Quarters. “We closed two deals in the fourth quarter that would have closed earlier. With travel restrictions continuing to limit foreign investors, it remained challenging to get deals across the goal line.”
Along with investor interest, volume has picked up as well.
“We have seen transactional velocity in our sector increase sizably in Q4 with the sale of several large portfolios, coupled with several significant one-off transactions,” says Peter Katz, executive managing director of investments at IPA. “Most of the recent closings represent assets that are highly occupied with little to no concessions at state universities with full in-classroom experiences. Also driving sales is that buyers have been able to secure extremely favorable floating rate or fixed interest rate acquisition financing.”
Overall, the industry is positive about what the fourth quarter placed on display for the entirety of the commercial real estate industry to see — that student housing is resilient and recession-resistant.
“The fourth quarter shows that the student housing sector remains incredibly resilient,” says Austin Repetto, principal of TSB Realty. “Based on the circumstances, we were encouraged to see transaction volume pick up at the end of the year and create some momentum heading into 2021. We continue to feel very positive about the months ahead and believe student housing is poised for a big year.”
Off To The Races
The first quarter of 2021 is proving Repetto’s statement true, at least in sentiment.
“I’m aware of at least seven deals that have closed in the first 15 days of the year,” says Layton. “The debt markets were clogged for some time and deals are finding their way into the endzone now that the holiday period has ended.”
Berkadia’s Larimer says his student housing group closed on nine properties totaling 4,376 beds in the first three weeks of 2021. Buyers for the properties included domestic institutional investors, foreign capital, private equity and high net worth individuals.
“Offers on those assets also represented the full spectrum of capital resources,” he says.
Some of the activity that’s happening early in the year is a “hangover” from 2020, mainly due to a slow in the speed of execution of deals due to COVID. Due diligence teams are not able to travel as often or frequently as they could pre-COVID, and other closing related services are taking longer to execute.
“The process for closing is simply taking longer,” says Repetto. “Completing due diligence, the restrictions on travel — especially from abroad [for international investors] — and limitations on acquisition debt are all factors that pushed certain deals into 2021.”
Investors report that they have begun to see more opportunities arise in the market since the 4th quarter of 2020.
“Activity definitely picked up in Q4 2020 and while we did see quite a few trades at the end of the year, we continue to work deals that will close in Q1 2021,” says Goering. “We expect other deals will go under contract soon with anticipated closings in Q1 2021.”
Like Goering, many active buyers in the space say they are raring to acquire.
“My pipeline is overflowing with activity,” says Layton. “We are in full-scale attack mode right now.”
It’s no secret in the industry that many of the best deals never quite come to the market. Instead, they are quietly shopped to a select group of potential, buyers pre-selected by the seller and investment sales broker. While that tactic works in times when the market is hot, sellers are known to cast a wider net when there isn’t as much buyer interest. Sellers are also known to do this when they don’t want it widely known that some pressure is forcing the property on the market. With COVID, the reason for quietly placing a property on the market may have had more to do with the confidence of the market than anything else.
“We have not seen fear of publicity as a factor in the decision how or whether to market assets — off-market, pocket listing, fully marketed, etcetera,” says Pierce. “Most would-be sellers in the spring and summer of 2020 opted not to list/market their properties. For those who did, there was a greater incidence of off-market or pocket listings as most would-be sellers and many brokers wanted to test the waters with regard to interest and valuation, but stopped short of launching a fully marketed process.”
Off-market deals often find themselves in the hands of buyers searching for specific opportunities.
“Off-market opportunities continue in the sector and generate interest by institutional limited partnership equity as well as significant sponsors,” says Katz. “Assets brought to market will have little trouble finding buyers as there are numerous seasoned sponsors with new and existing limited partnership equity providers, not to mention the influx of new international and domestic equity sources seeking to enter the sector.”
The lease-up and occupancy rates reported in the third and fourth quarters have bolstered the confidence of sellers to take properties to market. “The strong fourth quarter certainly helped some potential sellers who were sitting on the sidelines see that there is an active market out there for the right student housing properties,” says Repetto. “With more sellers looking to bring product to market, I’d say the overall attitude is more enthusiastic and optimistic.”
No one wants to sell a property for less than they feel it is worth. For many owners, 2020 was not the year to sell. And 2021 may not be either if the numbers are not showing buyers that the property has the strongest of fundamentals covered.
“Most owners are patient,” says Larimer. “If they own at universities that are conducting in-person classes at brand recognized universities in markets that had strong fundamentals prior to COVID, there is strong investor demand for those assets. However, if they are used to operating in the 97 percent to 100 percent occupancy range and find themselves below those occupancy levels this year, they see no reason to introduce their asset to the investment community until they return to their optimal occupancy.”
Buyers also have an issue if a property is leased under its historic numbers. Debt providers are more concerned today with a property’s performance than ever.
“Debt is focused on the year-over-year occupancy of properties,” says Jaclyn Fitts, executive vice president, national student housing for CBRE Capital Markets. “Occupancy has become a big driver as to whether things will come to the market now or wait a little longer. Any asset that is behind in pre-leasing because of COVID concerns will catch up as the unknowns become clearer.”
Pre-leasing for fall 2021 has been slower than normal, brought on by the fact that many universities closed in-person classes after Thanksgiving, traditionally a busy period for leasing activity. In addition, many delayed the start of in-person classes for the spring semester in January, putting off-campus leasing further behind. As a result, many properties that might have come to market during the first quarter are pushing their launch to the second or third quarters.
“It’s advisable to have pre-leasing numbers in mind so that you take that risk off the table and it doesn’t become part of the conversation during your marketing process,” says Fitts. “We have advised a number of groups to wait until April or May to bring properties to market so that we don’t have pre-leasing as part of the conversation.”
While that advice may apply for core properties in strong locations, for value-add assets, Fitts says the timing may be different.
“For some, we are saying ‘go ahead to market now so you can enact your value-add plan for the next academic year,’” she says.
Flight to Quality
While the COVID-19 pandemic may have proven that student housing is once again recession-resistant, buyers are not taking any chances. Most are interested in properties near Power Five football conference — Big Ten, SEC, ACC, Big 12 and Pac-12 — universities that have strong operating histories.
“Without a question there’s a flight to quality,” says Repetto. “As in recent years, the properties that continue to do best are well located pedestrian assets operated by experienced student housing sponsors, in university markets with 25,000-plus students.”
Part of the reason investors are so bullish on these markets is that money is also attracted to them.
“Power Five football conferences are the highest in demand for admissions and are getting the most interest,” says Pierce. “That is also driven by availability of agency debt to the most qualified buyers in those locations. That does, however, produce attractive pricing for assets in the other markets.”
At the beginning of the pandemic, many potential buyers hoped for a wave of distressed properties to hit the market. As discussed in our 3rd quarter review/4th quarter preview in SHB’s September/October 2020 issue, that wave of distressed assets never really came to fruition. But some buyers are having success in secondary markets provided they have strong financial backing.
“While there is capital available for secondary and tertiary markets, it is very selective as investors want to see more data related to enrollment, occupancy and financial health of institutions,” says Larimer. “Fall 2021 enrollment statistics will be important to some of these markets experience a normalization of capital flow.”
Debt, says Fitts, is going to play a major role in student housing acquisitions in 2021.
“We have to be cognizant of the terms and items that the agencies, specifically, are going to be looking at to drive their decisions,” she says. “Sellers need to make decision when to go to market based on that. Agencies are highly focused on year-over-year leasing and the debt markets are driving a lot of issues that affect buyers like type of properties they want to see, debt availability and terms.”
Relationships and operator experience continue to play a major role in debt availability, which affects who can acquire and what can be acquired.
“Relationships are key,” says Repetto. “This has never been more apparent than during the past year. With our long-term and existing clients, we’re finding that lenders are readily available, quoting and closing on student housing transactions. But with new clients, it’s been a slower process.”
Value-add continues to be a strong play for many buyers, though, especially those at larger schools. Buyers see these assets as a way to have a presence in a market and still increase net operating income and long-term value.
“As always, a great value-add property, well located at a major university, will garner tremendous interest,” says Repetto.
A number of sellers with assets in the market when the pandemic began removed them since pricing potentially could have been affected with factors like rent collection and fall occupancy undetermined in the second quarter. Another reason was pricing; the industry was at record low cap rates in 2019, and sellers did not want to see those conditions erode if at all possible.
“Most of the owners who entered 2020 with disposition intentions and who pulled back brought their properties to market in the fall,” says Pierce. “The positive performance of the asset class is expected to see more assets brought forward for sale in 2021. However, most sellers still have pre-pandemic pricing/cap rate expectations.”
Larimer says that for those in-demand pedestrian assets at top universities, pricing is consistent with pre-COVID times.
“There is more capital pursuing opportunities than there are available assets,” he says. “Student housing is benefiting from a continued decline in conventional multifamily cap rates. With interest rates near historic lows, student housing offers investors better cash yields without the need to increase cap rates. It is a true win-win for buyer and seller.”
— Randall Shearin
This article was originally published in the January/February 2021 issue of Student Housing Business magazine. To subscribe, please click here.