Considering the overall economy is still shaky, the capital markets are funding a lot of student housing deals these days at quite aggressive rates and terms.

With continued enrollment gains nationwide generally boosting rents and operating incomes at student housing properties, the capital markets are bullish on the sector.

“It’s never been easier to secure debt for student housing properties — and equity as well,” says veteran developer Donna Preiss at Raleigh, N.C.-based Preiss Co.

The most aggressive lenders might quote a rate as low as 4.5% to 4.75% for a seven-year mortgage secured by a solid asset. A rate in the low-5s is more likely with a 10-year transaction, Powell says.

Meyer expects that additional equity investors will migrate to student housing as the first wave of post-recession projects goes into operation — and gives a clearer indication of likely stabilized cash flows.

Institutional capital makes its move

For Bill Bayless, CEO of Austin, Texas-based American Campus Communities (ACC), a publicly traded REIT, no trend in the sector is more meaningful than seeing institutional capital accept student housing as a “mainstream” investment category.

For Bill Bayless, CEO of Austin, Texas-based American Campus Communities (ACC), a publicly traded REIT, no trend in the sector is more meaningful than seeing institutional capital accept student housing as a “mainstream” investment category.

Given the investment and finance activity taking place around the country and the resurgent development pipeline, it’s clear the credit crunch has passed in the student housing sector.

Investors pouring equity into the sector are factoring in expected rental rate hikes over the coming years, which appears to be a reasonable expectation, adds Nathan S. Collier of Gainesville, Fla.-based developer and operator Collier Cos.

Investors pouring equity into the sector are factoring in expected rental rate hikes over the coming years, which appears to be a reasonable expectation, adds Nathan S. Collier of Gainesville, Fla.-based developer and operator Collier Cos.

On the debt side, permanent lenders active in student housing are mostly limiting loan-to-value ratios to 70%, observes Randy Churchey, CEO of Memphis, Tenn.-based Education Realty Trust, a public REIT. Under certain circumstances a strong owner-operator might get to as high as 75%, adds Collier.

Regarding construction financing, Churchey notes that only a dozen or so top student housing players are able to secure funds from banks at attractive rates and terms.

Many construction lenders are limiting student housing loan-to-cost ratios to 70%, but with the strongest deals some might go as high as 80%, adds Collier.

More financing availability means several of the industry’s key players now have multiple large properties under development — with much more to follow. Churchey sees a lot of his peers eyeing the summer of 2013 as a fine time to deliver.

Equity investors in student housing projects generally expect returns about 200 basis points higher than with acquisitions of stabilized properties, Churchey calculates. That typically factors to a levered internal rate of return (IRR) in the mid-teens.

He’s also aware that more investors today are competing for acquisition opportunities than looking to finance development projects. So for an outfit like Education Realty with access to construction capital, development appears to offer better risk-adjusted returns than acquisitions.

Ditto for Preiss. “Development is where you’ll encounter the most risk, but it’s also where you’ll make the most profits and fees.”

What students want

But it has to be the right kind of product. Parents of today’s students prefer to have them live in the manner they’ve become accustomed to at home. “That means their own bedrooms, their own bathrooms — maybe a pool,” observes Churchey.

Meanwhile, Internet bandwidth has become the single most important amenity for a student housing property, emphasizes Churchey.

Indeed, given how much today’s students rely on online communication, reliable broadband and wireless connections have become a “core product” for student housing, adds Bayless of ACC.

Students’ use of technology also extends to how they search for — and pay for — their residence of choice. And savvy operators are accommodating them.

Not only are students likely to research prospective residences online after 10 p.m., but they also prefer to complete and submit applications online — including via mobile devices, points out Bayless. When interested students visit ACC properties, leasing teams now lend them tablet-type devices through which they can start applying.

Today’s students prefer to communicate with their apartment managers via text and e-mail, rather than in person, adds David Adelman, CEO of Campus Apartments in Philadelphia.

Operators that deliver those technological capabilities to residents have a competitive advantage, he continues, adding that each Campus Apartments property has its own Twitter and Facebook page.

More than half of ACC’s customers (primarily students’ parents) already pay rent online, “and the rate continues to increase every year,” Bayless notes.

This contrasts with the conventional apartment market, where a 2009 NMHC survey found that although more than 80% of apartment managers allow renters to pay rent online, only 18% of payments are made that way.

Indeed, when students “graduate” from student housing to regular apartments, they will be expecting many of these same services, such as online lease-renewal and managers who communicate via text and social media, not flyers under their doors.

On campus or off?

While many student housing operators tend to stick with off-campus housing, Churchey predicts a larger chunk of the budding development push will be on campus.

Administrators at cash-strapped universities aim to focus precious financial resources on educational activities, and they see housing development and operations as functions that can be effectively outsourced, he explains.

The REITs, armed with access to public equity and a relatively low cost of capital, are actively supplementing off-campus projects with various models of on-campus development activities.

As Churchey explains, on-campus developments generally follow one of two primary financial models: the private developer ground leases the site long-term and owns and operates the improvements; or the institution engages the developer to build — and in many cases operate — housing on a fee basis.

Education Realty is predictably happier with prospects for the former model than the latter, Churchey emphasizes. “It’s a real win-win. The university gets needed housing and maximizes the ground value, and we own and operate the facility.”

Some administrations are comfortable with privately owned on-campus development, but they will only work with qualified specialists capable of accommodating academic missions, adds Bayless.

Indeed, on-campus projects comprise about half of ACC’s current half-billion-dollar development pipeline.

Looking down the road, Collier sees the “fragmented” student-housing space as potentially ripe with opportunities for its most financially hefty players to acquire competitors.

Looking down the road, Collier sees the “fragmented” student-housing space as potentially ripe with opportunities for its most financially hefty players to acquire competitors.