Winter is coming. And by winter, I mean 2021. As the student housing community adapts to today’s COVID-19-driven reality, the rapid adaptation to this new normal allows us all to reflect on what is working now, how have we gotten here, and how developers are functioning amidst the precarious climate we are in today.
For those unfamiliar with the infamous HBO hit “Game of Thrones,” ‘winter is coming’ is the family motto of the House Stark. The meaning behind these words was one of warning and constant vigilance. The Starks, being the lords of the North, strived to always be prepared for the coming of winter, which hit their lands the hardest.
Admittedly, I have never been much of a prepper. I prepare for work, projects, goals and family needs as anticipated but I’m not stockpiling food, water, weapons and whatever else I think is necessary in the event basic services should falter and society turns chaotic as the zombie apocalypse finally arrives. Given how 2020 has gone so far, maybe it’s time to reconsider? But before I press the “oh sh*t” button, two words come to mind when reviewing the student housing landscape over the past nine months: resilience and collaboration.
Resilience is defined as the capacity to recover quickly from difficulties and toughness. Collaboration is defined as the action of working with someone to multiply efforts to produce or create. These two nouns are the lifeblood currently flowing through an industry that, over the past six months, has had to rapidly evolve to allow developers, operators and capital partners to navigate changing waters in real time, both for projects currently being delivered as well as in the pipeline.
Now into the fourth quarter of 2020, lenders have been slow to react amid the uncertainty of what 2021 will bring and a 2020 year of asset performance that cannot exactly be measured against typical barometers. I would love to believe that confidence comes roaring back in Q4, but we are still seeing a healthy amount of skepticism. Any type of second COVID-19 surge will likely lengthen the runway before lenders are more comfortable and you see some of their current requirements relinquished.
This is not all bad. When it is hard to source debt and equity, construction production and development pipelines contract. This allows supply and demand to balance out and gives many saturated markets the chance to recover as positive year-over-year rent growth creeps back. An added shot in the arm to this process in 2020 was many campuses de-densifying on-campus living requirements in the face of COVID and adding demand to markets that had not previously existed. Off-campus documented performance has been steady for the most part and is once again showing its resilience in the face of adversity compared to other commercial real estate sectors. When lender confidence does come back, will there be a rush of fee developers at the gate to find a site, any site, as has been the norm over the course of the past student housing development cycles? My two cents: developers are getting savvier and using the collaboration pulsing through the industry in this time of uncertainty to their advantage by gaining a clearer perspective of how to deliver successful student housing projects with the timelines and constraints laid before them.
It has always been my belief that development is a localized business. That is, localized collaboration with the correct groups/individuals on the ground with established community networks often determines the success of a project in the exceedingly early stages. Often, municipalities and residents are hostile or intimidated by the idea of a new student housing development in the pipeline. How does one manage when you add social distancing and virtual changes in the age of COVID-19 to the endless sea of moving construction costs, impact fees, rents, delivery pipelines and local community opposition? There are vigilant developers navigating these uncharted waters with success. In lieu of trying to fit a square peg in a round hole by forcing or fitting a development into existence, developers are adapting by bringing in consultants that can collaborate with the local players within established tolerances based on the current state of the industry as it relates to their firm’s risk. Instead of chasing every opportunity, I see developers chasing the best opportunities, as defined internally for fit from both investment and liability risk.
Operators are seeing the benefit of increased collaboration and interaction with the local universities whose students they serve. As these universities are adapting to their new reality related to housing, social distancing and mental health, off-campus operators are learning that through open channels of communication and a shared focus on student success, they can be an asset to universities as they de-densify bed spaces and reimagine the definition of living as it relates to the overall college experience. If third-party developers and operators hope to continue the positive collaboration between the on-campus and off-campus communities during the time of COVID, to get that right, a developer must be plugged into the student body that the final asset will serve. Simply replicating existing projects is not the answer to sustainability nor disruption. Understanding trends in health and wellness, residence life, study habits and how to properly activate space is key to building the brand loyalty that this generation is so passionate about.
The need for a liaison with synergy between the developer, design, local market and management is path critical to managing expectations as well as avoiding delays and overruns. Having an asset to connect the dots that affect your bottom line as a developer in addition to an understanding of how to convert from pro-forma to successful launch of an operational asset through the comprehensive life cycle of the brand is what brings the entire collaborative story to a positive end.
Gone are the days of amenity races, ‘bigger is better’ and delivering a project to students waiting for the next new incoming shiny penny. Late deliveries, false promises and shoddy construction, as well as saturated markets with heavy concessions, have over time created a savvy end user who is learning to use their voice. Like the House Stark, developers best heed the warning to listen, collaborate and continue the vigilance they have shown since March if they hope to come out of the other side of COVID. Winter is certainly coming. Who in the student housing development world has been vigilant and is prepared to meet the challenges ahead? Only time will tell, my friends.
— TJ Chambers is the owner and founder of Chambers Real Estate Advisors.
This article was originally published in the September/October 2020 issue of Student Housing Business magazine. To subscribe, please click here.