InterFace Student Housing ‘Power Panel’ Provides Optimistic Outlook for Year Ahead

by John Nelson

AUSTIN, TEXAS — It’s no secret that today’s commercial real estate market can be challenging, whether you’re looking to break ground on a new project or close a transaction. But there’s plenty to be optimistic about in the student housing sector moving forward, according to Peter Katz, executive managing director of Institutional Property Advisors.

Katz moderated this year’s “Power Panel,” which kicked off the first full day of the 16th annual InterFace Student Housing conference, held at the JW Marriott in Austin. The panel brought together a consortium of high-level executives to provide their thoughts on the current dynamics in the sector and their outlook for the year ahead. 

“I always feel the energy and the excitement in the student housing sector,” began Katz. “And while we feel a sense of tempered exuberance this year, the investment community is still extremely enthusiastic. Consumer strength is coming in hotter than expected and inflationary readings are pushing out the timing of proposed interest rate cuts from The Fed.”

Two years into the cycle of tightening from The Fed, investors are recognizing that the price adjustments that have already occurred have now become an acquisition opportunity, Katz continued. “And while there’s still pain in many other asset classes, student housing has remained a desirable niche marketplace compared to its big brother, conventional market-rate multifamily,” he said. “Transactional velocity remains temperate, but the investment community has seen student housing as a far better steward for its capital and will likely continue to do so.”

Wes Rogers, president and CEO of Landmark Properties, agrees, noting the investors that they have been talking to have a lot more conviction in where rates are going to be and that liquidity is returning to the space. “People have been on the sidelines long enough,” he said. “Investors are loving the performance of student housing, especially in relation to other asset classes that are struggling right now, so the sector is a really attactive place to put your capital. We’ve been receiving a lot of inbound calls from new investors that we’ve not done business with before.”

“We’re much closer to a meeting of the minds between buyers and sellers as far as what things are worth,” agreed Rob Bronstein, president of The Scion Group. “In an environment where you’re seeing forward net operating income growth like we’ve seen in student housing over the past couple of years, it’s not so much about cap rate as it is my bet versus your bet on what the next two or three years will look like. That’s how the deals are getting done. I mean, one man’s six cap is another man’s four if you have enough conviction about what you can do with the property.”

“It’s also sort of a case of haves and have nots,” continued Bronstein. “We did a very large Fannie Mae refinancing last year, and yet it represented something like 90-plus percent of Fannie’s entire production for the year. They told us they want to firmly stand behind big, credible borrowers who have delivered and they have sort of closed the gates for others.”

Development Update

Obstacles to construction starts, which have been numerous over the past few years, are starting to lighten up, according to Rogers. “Construction costs — which are still elevated — have moderated somewhat, but it was a real slog to get deals done last year,” he said. “Fortunately, transactions still happened and we’ve seen a real shift in the past 60 days. We’ve gotten four development deals capitalized and we’ve come out of the ground with $900 million in new construction starts this year, so we’ve really kicked things off in a great way this year.”

Dan Goldberg, president of Core Spaces, agrees, noting that the supply chain for the next couple of years in student housing looks incredible. “I think there’s a consolidation going on in this space, and the companies that are gritty and looking to innovate right now are going to disproportionately benefit, so that’s what we’ve been focused on,” he said. 

Core Spaces closed around $3 billion in transactions last year, with $1.5 billion on acquisitions and the balance on new development — which included two of the largest development deals in the company’s history, according to Goldberg. “We see tremendous opportunity in this sector if you’re willing to get gritty,” he said. “It’s really about leaning in with a disciplined approach. Not every market is the same and we don’t have a cookie cutter approach to development or acquisitions, but we’ve got capital to buy and build and we’re really kind of salivating over this environment right now.” 

The Issue of Oversupply

Despite an opportunistic outlook towards development moving forward, the sector has seen a drastic reduction in supply since 2020, according to Katz, who noted that the new supply that we have seen seems constrained to certain markets — ‘maybe 10 schools forecasting over 5,000 beds over the next three years’ — which poses the opportunity for over-saturation in certain areas of the country. 

Justin Gronlie, managing director with Harrison Street, notes that his company has created guardrails to try to steer clear of markets that pose a threat for oversupply. “We take the time to look at what number of beds we think a university market can handle on a macro level in coordination with its enrollment numbers,” he said. “In our experience, we’ve seen that even if you think a market can handle 5,000 new beds coming online, it might not still be able to in a year or two.”

Rob Palleschi, CEO with Austin-based American Campus Communities (ACC), believes that a lot of this risk can be mitigated by continuing to provide differentiated product that aligns with the needs of the university and students in the market. “Everybody continues to raise the bar and I am hopeful that differentiated product in alignment with universities will continue to keep new development safe from the rising tide,” he said.

“I get the concern when you throw 5,000 new beds into a market, but my bigger concern is continuing education and letting people know that our product is focused on safety and the security and wellbeing of students, and I think that will help carry us forward,” continued Palleschi.

From a development financing perspective, it can also be a tale of haves and have nots, with much of the financing going to top seasoned sponsors, according to Tim Bradley, founder of TSB Capital Advisors. “It’s been challenging, and we’re clearly looking at enrollment dynamics and cost-per-bed when analyzing markets for construction financing,” he added. 

“There are markets, though, like the one we’re in right now — Austin, Texas — that have been delivering beds over the past 10 years and the market continues to lease up and see rent growth,” said Bradley. “We’ll see how this year ends up, but this is an example of a purpose-built market that had a lot of people concerned with supply and has continued to be pretty stable from a lease up and rent growth perspective each year.” 

— By Katie Sloan

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