The resilience student housing has shown in the 36 months of the pandemic, combined with the rapidly rising cost of capital, has brought the biggest fish into the asset class’s pond.

That's made for crowded waters.

Institutional capital sources such as pension and sovereign wealth funds have significantly increased their allocations to real estate, specifically in sectors that, like student housing, have achieved tremendous rent growth and demonstrated resistance to downturns.

To achieve scale in the sector quickly, finance management giants handling institutional capital have either partnered with or acquired some of the largest developers and landlords. That has raised barriers to entry in the most appealing markets, panelists said at Bisnow’s Annual Student Housing and University Development Conference at the W Philadelphia hotel on Sept. 13.

In April, American Campus Communities agreed to be acquired by Blackstone for $13B after buying into a student housing portfolio owned by Landmark Properties last August. That same month, Brookfield entered a $1B joint venture with Scion Group to purchase U.S. student housing assets.

“It feels like every big developer has partnered up with a sovereign wealth fund or major financial sponsor,” Sumitomo Mitsui Banking Corp. North American Infrastructure Executive Director Michael Tranter said at the event. “If you want to be a player in this space, it feels like you need huge pockets or access to a huge financial backer.”

In the best of times, a bigger balance sheet can give a developer access to better loan terms from banks, as well as an inside track to win schools’ requests for proposals in public-private partnership situations, panelists agreed.

In the current environment, with inflation still rampant and the Federal Reserve’s monetary policy expected to keep tightening in response, the advantages of backing from institutional capital become more pronounced.

“What’s happening now is that only the large pension funds and life companies, and other players backed by them, will be able to compete because they can invest more equity and borrow at lower leverage points than private individual investors,” Bane Realty Capital President Neil Bane said. “Pension funds will be able to buy up assets in a tight environment.”

For smaller investors, or developers with less powerful friends, the most common alternative to being pushed around by institutional capital is to find smaller, lower-profile schools and college towns, panelists said.

But many of those markets suffered much more from the effects of the pandemic, as academia experienced a flight to quality not dissimilar to how office tenants are consolidating into the very best buildings in a given market.

Texas Southern University, the University of South Carolina and the University of Georgia’s main Athens campus all posted records for new enrollments this fall semester, while Columbus State University in Ohio and the State University of New York at Potsdam are facing budget shortfalls due to declines in enrollment, University Business reports.

With the cost of capital rising precipitously across the board, higher learning institutions without large endowments will face more of a strain, and do so with less margin for error. The effect of a college shutting down would be catastrophic for any student housing development nearby, unless it is designed in a way that can also suit traditional multifamily usage.

“You don’t know which campuses are going to go out of business in the next 10-20 years, but there will be a few,” said Joe Coyle, president of The Michaels Organization subsidiary Michaels Student Living. “And for smaller, private campuses especially, there’s a risk there. So if you’re near there, build apartments, and you can use them for student housing in the meantime, but if a school goes out of business, you can just go back to straight apartments.”

One method suggested by panelists for both finding ways to deploy capital around universities and ensuring against financial collapse is a new form of a term familiar to anyone with even passing exposure to student housing: public-private partnerships. Finding aspects of campus life that could be commercialized and commoditized, like concessions and parking, is a growing field that already counts American Campus Communities as a practitioner, Tranter said.

“There’s a broader view of the world in what equity investors can do for universities,” Tranter said. “There’s an opportunity for this industry to think about ways in which to offer up modernization on a grand scale.”