By Chris Wood
Proximity to campus continues to define investment winners in student housing even as value-add and tertiary market plays heat up.
Development opportunities for student housing are getting scarcer, and the amenity war is full on. The sector’s leading firms are focusing on location but are also embracing value-add opportunities and overlooked markets to compete.
Big Schools, Big Competition
For some firms, location, location, location still drives the investment thesis. One thousand fifty-six feet. At 0.2 miles, that’s about a four-minute walk for the average Generation Z 20-something, and it just happens to be where Philadelphia, Pa.-based Campus Apartments nets out when it comes to average proximity to campus across its portfolio of student housing properties serving more than 50 colleges and universities in 18 states.
“No two of our developments look the same, and each site presents a different opportunity, but at 0.2 miles on average, most of our communities are really touching up against campus,” says Campus Apartments President and Chief Investment Officer Daniel Bernstein. “There is one engine that drives demand, and that’s the university itself.”
Some 20.4 million students attended American colleges and universities this year, a 25 percent increase of about 5.1 million students since fall 2000, according to data tracked by the National Center for Education Statistics (NCES). In 2016, larger public state universities made up 74 percent of all student enrollments, and NCES forecasts that ratio will remain relatively steady through 2026.
“There is absolutely a premium on distance to campus,” says Travis Prince, executive managing director of the student housing capital markets team at Chicago-based brokerage firm Cushman & Wakefield. “There are a finite number of Tier I schools and a finite amount of land and opportunities that are proximate and pedestrian at these major state schools. Performance in these markets was good through the downturn, and there is certainly a prevailing view that these are steady income investments in that regard.”
John Wieker, chief investment officer at Chicago-based Core Spaces, says markets with a Tier I state university will stay hot with investors because of anticipated enrollment growth and high barriers to entry. “Location is key, and the student housing investment community has embraced this more than ever as investors pursue defensive positions,” Wieker says.
Looking for Value
The definition of location might be shifting though, based on market conditions. Rising construction prices, increasing taxes and the availability of well-located land are making development opportunities that pencil out harder to find.
On the deal-flow side, demand is outpacing supply, keeping cap rates low, and doing the larger portfolio deals that have characterized the sector are less likely. As a result, many market watchers expect increased interest in both value-add acquisitions and secondary/tertiary market development.
“There are fewer opportunities to take down a $300 to $500 million portfolio,” says Prince. “Generally, the broader consensus is that we are later in the cycle, so owners could be looking at investments as longer-term holds.
“There are whispers today to buck the trend and go away from campus and build more affordable, less expensive product, particularly as you run out of opportunities to build premium up close, and you are building premium assets for a small segment of the market who can afford it,” adds Prince.
While secondary markets might not have as much competition, investors are keen for a firmer grasp on fundamentals and risk as compared to Tier I capital placements. “Hot doesn’t always mean biggest, and we're having success in smaller markets with a good investment dynamic,” says Bernstein.
“In smaller markets, we are looking for existing product or really well-located sites that are, again, proximate to campus,” says Bernstein. “We want to make sure we understand the off-campus supply coupled with on-campus supply, so whatever property we are looking at is not burdened by absorption. With less head count, you pay closer attention to those numbers.”
“We expect the pendulum to swing toward value-add deals,” says Wieker. “As existing product ages, we believe more value-add opportunities will arise.”
Still, developers have been mostly receptive to supply-demand curves in most markets. “There certainly are several over-built student housing markets adjusting to absorb recent oversupply, but there remains a finite supply of land available in close proximity to major public universities,” according to Fred Pierce, a noted market watcher and president and CEO of San Diego-based Pierce Educational Properties.
“Admissions demand continues to remain remarkably high, and recent reductions of new deliveries demonstrate market prudence and portends well for continued strong performance in the student housing sector,” says Pierce.
NMHC’s Student Housing Conference, scheduled for October 3-5 at the Hyatt Regency in Huntington Beach, Calif., will explore a wide range of topics from managing university relations to addressing return on smart-home systems. nmhc.org/shc
Chris Wood is a freelance journalist based in San Francisco. He writes about real estate, technology and construction.