Today's Biggest Student Housing Trends
Cap rates are ticking up for student housing acquisitions, but investors are still lining up for the hot asset class. “Debt is still cheap, so who cares?” said Walker & Dunlop SVP Will Baker, kicking off the second day of our national Bisnow Annual Student Housing Summit. (Click here for day one coverage of BASH.)
“There’s so much capital coming from every source,” says Ackmann-Ziff managing director Marc Schulder (bookended by Rittenhouse Realty Advisors managing director Ken Weller and Harrison Street Capital SVP Brian Thompson, above), including life companies, regional banks, and CMBS. (You've got more choice of lenders at this point than you do pizza toppings.) Even Fannie and Freddie are slower because of all the options out there, Ken says. But Marc says that some lenders are still shying away, scared of the high turnover. Others, though, are recognizing that such turnover can lead to significant rent increases upon vacancy. One deal Brian is not after, though, is land—he says its LPs are very risk adverse, so instead Harrison Street looks for deal partners and pays a good promote for them to take on that risk.
One concern brought up by the panelists was expiring master leases. The Preiss Co CEO Donna Preiss (with MSC University VP Matthew Stein, who moderated, and Will) says her company bought an empty student housing project in the middle of the recession for 50 cents on the dollar of the original capital stack. The school called and wanted to take out a master lease, but a few years later pulled out as it decided to instead focus on its on-campus properties. After being through multiple bank cycles, she says she’s a big believer in low LTV (for her, no more than 65%). Lower leverage means a safer deal and low interest, she says, and as a steward of people’s money, that’s the way to go.
Landmark Properties CEO Wes Rogers, who spoke on our developers' roundtable, is looking at both cottage and urban infill deals, particularly in communities within walking distance to campus. He’s concerned about rising construction costs pinching yields (down from as high as 10% a few years ago to around 7.5%), but adds that he likes high barriers to entry as well as entitlement challenges and creating value through upzoning. Donna, who also spoke on the panel, is a fan of college markets like Austin and Raleigh, with diversified economies and a safety net for assets in the form of strong job growth. She and Wes agree that retail can drag down student housing because of zoning and underwriting requirements. Her favorite amenity? Lazy rivers—a fun and cheap way to engage students socially. (Some are already pretty lazy... you just have to add the river.)
EdR SVP Julie Skolnicki (with McGladrey partner Beryl Simonson, who moderated) says that with EdR’s preference to build on-campus or adjacent, she’d like to focus on more specialty projects, especially housing for grad students and honors colleges. Building expectations have been turned on their head by Gen Y, who are embracing smaller (even micro) living units and smaller parking ratios. (They care more about bandwidth than square feet.) And thanks to zoning changes, Julie observes, higher-density projects are much more doable today than even four years ago. Donna adds that a post-recession paradigm shift has made top-tier students and their families more willing to pay top dollar (she pegs it near $1,400/month) for housing right on or close to campus.
Will MOOCs (massive online open courses) eventually hurt student housing? If anything, MOOCs are taking on the format of larger lecture hall courses, which will allow professors to focus on smaller, personalized classes on campus, says Julie, who also spoke on our "What's Next?" panel. The real problem lies in the cost of higher ed. “We’re at a critical point where once a public good (higher ed) is now a private good, which has huge implications for the future of a country that needs an educated workforce,” Michigan State University VP Vennie Gore (right, with George Washington University director of housing Seth Weinshel) says. Julie says there’s been an uptick in inquiries from the more-affordable community colleges and branch campuses looking to build student housing.
Drexel executive director Matt Nocifore (bookended by Xfinity VP Mike Slovin, who moderated, and Campus Evolution CEO Andrew Stark) says that students think IT is a right and have expectations that everything they have at home is available at the dorm, which is a challenge. (And they’re bringing a lot of devices with them, panelists say—smartphones, laptops, PlayStations, and smart TVs among them. Fun fact: Matt still has his Mac from when he graduated Drexel in the early ‘80s.) Wired infrastructure isn't used as much anymore, he says—Drexel has seen a 20% drop and is now reusing the wires to enhance wireless infrastructure. It used to be eight students to one WiFi radio, but that ratio has since tightened to four students.
We snapped great sponsor Boomerang Systems’ Michael Paddon and CEO Mark Patterson, who told us about the automatic, robotic valet parking system. One concern that many students and their parents have are the safety of parking garages, Mark says—but such a robotic system keeps them to the ground level, “which isn’t dark nor dangerous.” Bonus: Since it’s robotic and you don’t need all that space for humans to park their own cars, it gives back real estate to developers who can use it to generate other revenue. One school to use the system (240 spaces) is the University of Illinois at Urbana-Champaign.
We also snapped CORT's Paula Green and Evan Allen, who told us they loved the inaugural BASH summit last year so much that they came back this year to sponsor. They were showcasing CORT's furniture rental and management services, providing residence halls with ample furnishings for both dorms and off-campus digs while alleviating deferred maintenance and over-enrollment. It takes the hassle out of moving, says Evan, and means that housing operators don't have to be bogged down in the furniture business. (And that students can limit their IKEA runs to just the Swedish meatballs.)