By Taylor Williams
Student housing developers say now is a favorable time to aggressively pursue new projects as their customers voice a strong desire to resume on-campus learning, and they are using lessons learned over the past six months to bring debt and equity partners to the table in order to jump-start deals.
Whereas demand drivers for new development in the traditional multifamily space typically center on job and population growth, the student housing sector often responds to different economic and social factors.
In the COVID-19 era, these fundamentals are manifesting themselves in unusual ways, such as with empirical data suggesting students overwhelmingly want to return to campus. A survey of 800 college students conducted earlier this year by Axios and College Reaction found that 75 percent would prefer to return to campus, even if it meant giving up parties and sporting events.
Developers also point to several positive indicators, including moves by prominent universities to reduce density on campus without compromising enrollment, the inclusion of parental co-signors on new leases and the simple fact that occupancy in the space is not linked to unemployment.
With regard to concerns over diminished enrollment, developers are encouraged by the fact that some schools recently removed or reduced the importance of SAT/ACT testing scores from their application vetting processes. In theory, this measure should serve to keep enrollment rates in check, even as housing environments on campus move toward lower densities.
Collectively, these market forces paint a picture of an asset class that should be well poised to absorb new supply upon delivery in the next 18 to 30 months.
Developers also note that prior to the pandemic, the student housing space had become increasingly crowded with new supply, particularly in core university markets. With a strong uptick in development came more competitors, thereby compressing yields and forcing many players to look to secondary and tertiary markets to achieve comparable returns.
An annual report from student housing developer and operator FourPoint Investments stated that the industry saw record-setting volumes of investment sales activity every year between 2016 and 2018. Deal volume slowed in 2019 due to a lack of large portfolio sales, but pricing did not fall, and cap rates for the asset class compressed for the sixth consecutive year in 2019.
The report’s authors also noted the perceived stability of student housing as a factor in attracting investors. “Once considered a much riskier asset class than conventional multifamily, the most recent data illustrates that the spread between student housing and conventional multifamily cap rates has reached an all-time low,” the report stated.
On some level, COVID-19 has served to ease these levels of competition. Combined with the industry’s strong belief that Zoom classes and virtual seminars are no substitute for in-person classes and that students (and parents) very much want to get back to the old way of doing things, there is a strong case to be made for developers breaking ground soon and delivering units in 2022.
It’s Not All Rosy
The world of college- and graduate-level education has seen its share of negative headlines during the pandemic. Coupled with the fact that capital sources across most of the spectrum of commercial lending are operating with increased caution, developers have their work cut out for them in terms of financing their projects.
The challenge of finding available land on which to build in top markets, ensuring safety on job sites, adjusting unit mixes and common-area protocols to the demands of the COVID-19 era, and devising stories that will appeal to lenders and investors were all discussed at InterFace Conference Group’s Student Housing 2020 virtual conference this week.
The National Multi-Housing Council (NMHC) and InterFace Conference Group co-hosted the four-day event, which took place on Oct. 19 to 22 as a joint event, replacing their physical events which normally take place in April (InterFace Student Housing) and October (NMHC Student Housing).
Jaclyn Fitts, executive vice president at CBRE and co-head of the firm’s student housing team, moderated the panel on development. In addition to sharing stats and personal analysis, the panelists shared anecdotes of how they have navigated various phases of development to better prepare them for the future.
How to Assemble Land
Julie Skolnicki, senior managing director of university partnerships for Greystar, identified some practices that her company has used to assemble sites in Tier 1 markets, specifically the University of Alabama in Tuscaloosa.
Skolnicki noted that Tuscaloosa’s home to an R1 university (meaning an institution that offers high-level doctoral and research programs) and a member of one of the Power 5 sports conferences (ACC, SEC, Big 10, Big 12 and Pac 12), which makes it a very sought-after market.
In January 2019, after several years of heavy supply additions, the City of Tuscaloosa instituted a moratorium on multifamily developments of 200 bedrooms or more — in other words, apartments for students. The city council subsequently voted to let the moratorium expire on May 30 of this year.
“This is a market that has a great story, but it’s been a difficult market in which to develop for some time,” she said. “We were able to identify a dislocation in the market and assemble some land and really hit a sweet spot within that zoning moratorium that allowed us to get some additional density on the site, as well as [achieve] higher returns. That was an aspect of this deal that allowed us to create a unique, market-specific story for investors.”
Skolnicki added that with its Tuscaloosa project, Greystar also reviewed the university’s recent enrollment patterns and revised its unit mix to reflect pandemic-related shifts in demand — generally a preference for more studio- and one-bedroom units as opposed to two-, three- and four-bedroom residences.
Since March, Charleston, S.C.-based Greystar has closed deals for six sites that, all combined, are approved for more than 4,000 beds and valued at more than $800 million, with the bulk of that activity occurring after the first couple months of the pandemic. Greystar’s Tuscaloosa project, which is located near the university’s football stadium and Greek Row, is slated for completion by 2022.
Financing on the Fly
Panelist Matt Marshall, vice president of development at RISE, referenced the Anthem House project at the University of Florida in Gainesville as an example of how the pandemic has upended the typical practices of securing financing for new student housing developments.
Business was proceeding as usual in terms of securing financing when the pandemic hit. The senior lender informed the development team at RISE that the loan closing needed to occur by a specified date to ensure that the deal didn’t fall through.
“We were so far along from a predevelopment standpoint that we had no option but to close by the lender’s specified date,” said Marshall. “At the time, we just assumed it was general uncertainty from COVID. But we later found out that the reason the closing date was ramped up was due to all of the federal stimulus money and loan programs that were being deployed. The lender had to reroute all of its internal manpower to deal with those issues for its commercial clients across the country.”
Marshall added that the team did in fact close on its construction financing by the specified date, but not without a fair amount of short-term disruption and a harried sprint to the finish line.
Marshall later touched on the equity side of the capital markets, noting that many investors remain on the sidelines. In some cases, this reflects a more cautious approach in general to deploying capital. In other cases, the sidelining is a factor of the investors being new to the space and not having lived through previous downturns.
“It was a pretty significant concern that if you needed an equity partner this fall, unless it was a very experienced firm in the student housing space, you were going to struggle,” he said.
Panelist Brian Dinerstein, president of The Dinerstein Cos., noted that many commercial real estate classes have faced similar challenges with regard to securing equity partners.
“This has been a surreal experience, but student housing hasn’t really been painted with any worse of a brush than most of the other food groups, and certainly better than the likes of hospitality or retail,” he said. “There are challenges, but that’s healthy and reflects the market working to respond to conditions.”
Dinerstein later noted that the headwinds facing student housing now are different from those of 2008, mainly due to the impact of the coronavirus on occupancy and that the space has become more heavily regulated as it has grown over the past 12 years.
But the hesitancy of the lending community to finance new construction and to underwrite levels of revenue growth consistent with developers’ expectations represent similarities between now and then, he said.
Construction Industry Adapts Overnight
Craig Zogby, managing director at Kayne Anderson Real Estate, cited Verve, a recently completed project serving Rutgers University in New Jersey, as an example of how general contractors and subcontractors quickly adjusted their onsite safety policies to keep construction moving forward.
“When COVID hit in March, we knew we were facing an uphill battle because we were in the epicenter of the outbreak at the time,” he said. “There were no protocols for the construction or operating side of the business, and everyone was scrambling to do right by their labor forces.”
“But we saw that as our contractors put playbooks together, the subcontractors did the same,” he continued. “Screening temperatures at the gate, implementing a logistics plans that governed movement within the building, and utilizing contract tracing for positive tests — that really helped keep the wheels from falling off.”
While some brief project delays did occur, Kayne Anderson nonetheless completed Verve this fall and has since begun to welcome students into units.
Depending on where a project stood at the onset of COVID, some developers incurred additional materials costs for features that promoted health and wellness, such as individualized study rooms, automatic doors and touchless faucets in common areas. While implementing these features may not have been feasible for some projects, they will all have to be considered on future construction, the panel concurred.