It’s no secret that the investment sales market has been sluggish this year. But while sales volume is unquestionably slower, investors are still finding stabilized opportunities that are poised to deliver outsized yields in the near term, according to Timothy Bradley, founder of TSB Capital Advisors and principal with TSB Realty.
Most of the properties that are transacting can be found in Power Five university markets, or those that exhibit similar supply and demand metrics, notes Bradley. And the investors making these deals pencil tend to be experienced in the student housing sector with strong existing relationships in the space.
The brightest spot, as far as equity providers are concerned, is that student housing is seeing a better risk-adjusted yield proposition than conventional multifamily and other asset classes, continues Bradley. “What that means is we’re talking with groups now that are spending more time and resources contemplating investments in purpose-built student housing than they have in the past,” he says.
Fundamentals in the student housing space are also at or near all-time highs, which is driving net operating income, according to Jaclyn Fitts, executive vice president and co-lead of the national student housing team at CBRE. “This income growth offsets much of the rise in cap rates, so student housing valuations have held up better than other asset classes,” she says.
“As a result, we aren’t seeing as great of a bid/ask spread, allowing for more transactions than in other asset classes of commercial real estate,” Fitts continues. “Student housing’s excellent fundamentals are also drawing more equity to the sector. We are seeing an increase in loan assumption transactions, given their attractiveness in today’s rising interest rate environment.”
This is all to say that, though the market has undoubtedly been slow this year, buyer demand remains, fundamentals are strong and transaction volume is expected to accelerate through the end of 2023.
“It takes an open and honest dialogue between buyer and seller and a willingness to work through challenges that arise along the way, but deals are still getting done,” says Andrew Feinour, president and CEO of Student Quarters. “The lending markets are certainly constrained, but debt is still available and strongly capitalized student housing owners and operators are still acquiring good real estate.”
The fourth quarter, which typically sees a strong uptick in properties coming to market, is poised to look a little bit different in 2023. “Fourth quarter activity is going to be a bit more muted this year,” says Troy Manson, principal of University Partners. “But I would expect marketing activity to continue to pick-up as sellers begin to exhibit strong leasing velocity and rent growth heading into the 2024-2025 academic year.”
“Properties in strong markets showing solid rent growth and speedy leasing will be clamored over,” he continues. “Though lenders will not likely give credit for next year’s rents, buyers will be able to underwrite to lower initial yields.”
Peter Katz, executive managing director of Institutional Property Advisors, a division of Marcus & Millichap, agrees, noting that the sector will not experience a sizable increase in deal flow until interest rates or spreads settle down and stabilize.
And while the majority of deals transacting today are Class A, distressed assets are also still being traded to all-cash buyers, according to Ken Wellar, founding partner with GREA. “We sold a 378-bed student housing portfolio near Bloomsburg University and The Heights at Slippery Rock, near Slippery Rock University in Pennsylvania,” he says. “Both transactions were cash deals in secondary markets.”
In keeping with this year’s slower pace, large portfolio transactions — which typically come to market during the latter parts of the fiscal year — are not likely to be seen in 2023. “With institutional capital continuing to be cautious given current capital market conditions, bigger is not better right now,” says Kevin Larimer, senior managing director of investment sales – student housing with Berkadia.
“Portfolios that have been available did not see pricing premiums and were ultimately split up,” he continues. “Until we see stability in treasury yields, investors will continue to be cautious making large bets.”
JD Goering, senior vice president with Landmark Properties, agrees. “So far this year, there really haven’t been any large portfolio trades, and that is due to the disruption we’re seeing in the capital markets,” he says. “Over a year ago, the larger institutional investors were looking for scale. Now, these investors are still very interested in the space, but they’re looking more at single-asset transactions.”
Portfolios, where they are being marketed, are at a discount, according to Fitts of CBRE. “Most investors want to take down smaller transactions in this time of uncertainty,” she says, noting that CBRE brought 14 assets to market for one seller and ended up transacting with eight different buyers.
Developers have also been more likely to hold properties since the start of the COVID-19 pandemic. This trend is still being seen, according to John Preiss, president of The Preiss Co. “The movement towards keeping developments longer still remains, but I believe we are going to see more properties hit the market as construction loans mature,” he says. “Developers may want to hold an asset, but not be able to due to conditions in the permanent debt market.”
The Preiss Co. has completed three recapitalizations this year, giving itself more time and flexibility to execute deals — a necessity in this environment, according to Preiss. “Sales processes seem to be extended,” he says. “Brokers are having to work a lot harder to generate activity. The process is very buyer friendly at the moment.”
Despite a slower transactional year, new entrants are still coming to the student housing space. “We’re seeing many new domestic equity groups, private high net worth individuals, conventional multifamily investors and foreign capital groups,” says Teddy Leatherman, managing director with JLL Capital Markets.
“We have had conversations with nine domestic equity groups who are looking to enter the U.S. student housing space,” she says. “Additionally, Latin American capital is very active as the peso is currently very strong compared to the U.S. dollar. Many Middle Eastern and Asian capital groups are also looking to enter the space.”
“Private capital and 1031 exchange buyers have been the most active this year, but many institutions have capital that needs to be deployed,” says Leatherman. “I am confident they will be more active by the end of this year and going into 2024.”
To this end, most of the buyers in the market today are looking to be in the sector for the long haul, notes Goering of Landmark. “These buyers are focused on acquiring quality assets located near Tier 1 universities,” he says. “There are fewer buyers chasing yield in tertiary markets given the underlying fundamentals of the institutions. It seems every year, there are more and more new entrants to the space, which continues to validate student housing as one of the strongest asset classes in real estate.”
While the buyer pool is still somewhat competitive in the current economic environment, the level of competition is largely market-specific, according to Larimer. “There are some markets — like Clemson, South Carolina, and Tennessee — where offerings are seeing significant competition, while other markets generate a moderate level of interest,” he says. “Capital is currently risk adverse and generally reluctant to lean in aggressively,” continues Larimer. “As a result, the sale process and call for offers is taking a little longer.”
But many groups still have not deployed mandatory capital this year, so demand from the buyer side will likely continue to rise through the end of the year, according to Wellar. These deals, however, are going to be more difficult to close. “Free and clear deals are going to be tough with the 10 year treasury at 4.5 percent,” he says. “Buyers are going to have to pay all cash or accept lower-leveraged deals to get them done.”
At the end of the day, the industry’s strong performance despite economic headwinds is keeping investors eager to transact. “A lot of the large sponsors are still extremely active, as are new capital partners looking to capitalize on student housing’s strong fundamentals,” says Douglas Sitt, executive vice president of capital markets with Vesper Holdings.
“There will still be challenges getting deals executed because of the high interest rate environment that we’re in, but properties that have loan assumptions that are in great markets should fare well on the disposition side,” he says. “We are very active and are in contract on a few hundred million dollars worth of student housing deals that we are extremely excited about. When it comes to institutional-quality student housing in Tier 1 markets, there is still a lot of interest from buyers.”
This article was originally published in the September/October issue of Student Housing Business magazine.