Setting out to become the first real estate investment trust (REIT) devoted exclusively to the student housing sector, American Campus Communities Inc. in April filed a $253 million initial public offering (IPO) through lead underwriters Citigroup and Deutsche Bank. But will a property type synonymous with keg parties, corridors littered with pizza boxes and ear-splitting stereos drum up investor interest?
“Student housing is a niche play,” says Barry Vinocur, editor of the REIT publication Realty Stock Review. “The essential question is how big the niche is. Then you have to look at the economics of the student-housing business.”
American Campus Communities of Austin, Texas, has been a student housing developer and property manager since 1993, and last year recorded $24.8 million in net operating income. The company owns 16 student-housing properties with another three properties slated to open this August.
Quiet-period restrictions imposed by the Securities and Exchange Commission (SEC) prevent American Campus Communities from commenting on the IPO. But in its filing, the company identified several factors that it believes have created “significant investment opportunities” in the ownership, development and management of student-housing properties.
Those factors include growing demand for student housing due to rising enrollments and a limited and obsolete supply of on-campus housing. Peterson's, a provider of educational information on college admissions and enrollment, indicates that the largest public institutions in each state have on-campus housing capacity for only 21% of their enrolled students on average.
That's good news, but the economics of student housing differ from traditional multifamily. First, there is the issue of the leasing cycle. As the American Campus Communities filing notes, the leasing cycle follows a college's academic calendar. Student housing developments must be entirely re-leased each year compared with traditional multifamily product that can be re-leased throughout the year. That makes marketing efforts a paramount concern.
“Student-living property management and asset management teams understand that the school calendar dictates their opportunities,” says Greg Bates, managing director of GE Real Estate in Stamford, Conn., which has jointly developed more than 50 off-campus communities since 1994 with Irving, Texas-based partner JPI Cos. “It's important to identify the limited moments of opportunity early in the cycle and maximize lease-up, renewal or turnover activities accordingly.”
As sophisticated, national players focus on this asset class and become more educated on the underwriting, leasing and management of student properties, says Bates, “it will be viewed as more of a mainstream investment opportunity.”