Continued Industry Growth, High Investor Interest Lift Student Housing Sector
AUSTIN, TEXAS — Sunny skies continue to be the forecast for the student housing sector, with investor interest in this property niche continuing to increase, more institutional capital flooding into the space and a continued demand seen for new development.
Each of these points of growth was highlighted extensively during last week’s InterFace Student Housing conference in Austin. The conference’s first general session, titled “The Power Panel,” brought together a consortium of CEOs from the industry’s top companies to discuss their perspectives on industry trends, the future of the sector and capital markets shifts, among other topics.
“There has never been a more intriguing time to be in the sector,” began moderator Peter Katz, executive director of Institutional Property Advisors. “The vast majority of the industry is showing significantly solid year-over-year NOI growth, coupled with institutional and private capital flooding into the space. The quality of the product and the performance of the industry stands on its own among other real estate sectors.”
“Being the 10th anniversary of this conference, and thinking about all of the conversations that we’ve had over the last decade, we’re finally realizing everything that we had hoped would occur in the industry,” continued Bill Bayless, CEO of American Campus Communities. ”When you see the cap rate compression taking place and the global equity that is flowing into the sector, it is all based on the risk-adjusted return that we, and so many of the sector’s companies, have put forth over that decade.”
“When you see the stability of cash flows that this industry offers, coupled with what is still a supply-and-demand imbalance in favor of more supply needed, it is a rare opportunity in real estate,” added Bayless.
Wes Rogers, president and CEO of Landmark Properties, points to stability and continued demand as drivers for investment in student housing properties.
“Investors that we talk to are attracted to the space because of the stability of cash flows over a long period of time,” said Rogers. “They’re also attracted to the supply and demand fundamentals — 45,000 beds being delivered nationally is less than enrollment growth at the top 180 universities. Big picture, supply and demand is still in great shape, which is not necessarily the case in the multifamily sector.”
Randy Churchey, CEO and chairman of the board for EdR, also points to the wealth of information available today as a catalyst for the continuing increase of institutional investment in the sector.
“You have two public companies that publish information all of the time, and stock analysts following those companies,” said Churchey. “Axiometrics has data out about how well the industry has performed, as well. That wealth of data available for institutional investors to look at and analyze has helped a great deal — and the data is largely positive for investments in our sector.”
Tax Reform Raises Concerns
The next topic of discussion was tax reform, and its impact on commercial real estate as a whole, and more specifically the student housing sector.
“At first, we were very nervous about the new tax reform legislation, as it increased the hold period for carried interest from one year to three years,” said Rogers of Landmark. “We employ a lot of carried interest, and have been able to successfully convert the vast majority of our income to long-term capital gains over the years, so we were very concerned with that increase in time and what it was going to do to the tax rate that we paid.”
“Fortunately, we’ve been largely able to structure around it,” continued Rogers. “On the net, it’s probably going to be good for us because of the lower ordinary income rates that result, despite having the same long-term capital gains.”
Peter Stelian, CEO and founder of Blue Vista Capital Management, disagreed.
“I think the capital gains issue is going to be a huge issue,” he countered. “I don’t think that the U.S. Department of the Treasury has fully sorted out the issue, nor has the development industry fully absorbed the issue. In particular in student housing, as opposed to traditional multifamily, it puts a lot more risk on a developer.”
In 2017, the industry saw another year of reduced deliveries — around 40,000 beds, after experiencing an all-time high of 63,000 beds in 2015.
“The natural barriers to entry that exist in most college towns are why you have seen the slowing,” said Bayless of American Campus Communities. “If you go back five to 10 years ago at this conference, I would say back then 70 percent of the developments were taking place a mile further from campus. People did not put as much credence on proximity to the campus and really driving consistent occupancies and rental rate growth.”
“As you have seen companies’ business plans appropriately shift, the real opportunity in the sector for the greatest stability of cash flows is [walking distance] to campus,” continued Bayless. “Those sites are fewer and far between. It’s harder to do those deals.”
Churchey of EdR agreed.
“The folks that got killed in student housing back in 2008, 2009 and 2010 were really the ones that developed a long way away from campus,” he said. “Within a half-mile from campus, there is a natural barrier to entry because there’s a finite amount of land. If you get outside pedestrian-to-campus locations, it really opens up a whole swath of available land to build upon. If that is where developers end up going, that will hurt the industry.”
Big Portfolio Deals Make an Impact
Katz shifted the conversation by noting that 2017 saw large institutional acquisitions by Mapletree Investments, American Campus Communities and two different portfolio acquisitions by The Scion Group, GIC and CPPIB. He then questioned the panel on the impact of these large portfolio transactions on the sector, and on whether or not they foresee continued industry consolidation in the years to come.
“We strongly prefer buying portfolios for a litany of reasons. Operationally, it’s a lot more attractive to onboard significant portfolios at once as opposed to piecemeal,” said Robert Bronstein, president and co-founder of The Scion Group. “We’re absolutely continuing to pursue them — we’re pursuing several right now.”
Each CEO noted strong performances for the year, and an optimistic outlook for years to come. To read more information on this year’s InterFace Student Housing conference, click here.
— Katie Sloan