In Spite of Difficulties, Virtus Still Sees Opportunity in Student Housing

While investing in student housing has recently become more difficult due to inventory and financial constraints, Virtus Real Estate Capital remains optimistic about the health of the sector, especially near tier-one schools.

While options to invest in student housing become more difficult due to inventory and price, professionals remain optimistic about the health of the industry. Despite a slowdown in REIT participation in student housing in recent years, market specialists believe current and future trends with regard to transactions, student demographics and development opportunities will allow the industry to continue to evolve.

“We still believe that student housing is a great investment,” Kevin White, director of student housing acquisitions for Virtus Real Estate Capital, tells MHN. “I think it’s certainly more difficult today than what it was 24 months or 36 months ago. You have to work twice as hard to do half the amount of deals than you really want to do.”

Austin, Texas-based Virtus Real Estate Capital specializes in what it refers to as “recession resilient” real estate assets including medical office space, seniors housing, student housing, and self-storage space, and has a national portfolio of such non-traditional properties that is heavily concentrated in the Sunbelt region.

White tells MHN that there have been a lot of changes in the student housing marketplace recently that have had significant impacts on the transactions side of the industry.  The first and foremost, White notes, is that the cost of debt has increased. Secondly, REITs generally have moved away from making more student housing acquisitions.

“The REITs, who in recent years have been one of the most active buyers in student housing are now sitting on the sidelines for acquisitions,” White says. “It has created an interesting dynamic where the buyer pool has now shrunk significantly because you have the REITs sitting on the side. On top of that, the cost of debt has increased. Most of the buyers left out there are going to be high-leverage, private buyers, so that significantly impacts their cost of capital.”

White also notes that financing for new developments is slowing down as a result of the exit of REITs from the market combined with rising CAP rates, interest rates, construction costs and a shrinking buyer pool.

“The developers are getting squeezed pretty significantly,” he says.­­

Despite the difficulties in the financial side of student housing, White says there are other indicators that are driving investment into the industry, specifically enrollment numbers at tier one flagship schools.  He notes that enrollment for first-time, under 24-year-old college students has increased nationally in recent years, while non-traditional students—those ages 24 and up—have posted declining enrollment numbers.  The majority of students living in student housing tends to be the under-24 students, as the non-traditional students tend to live further away from campus in non-student housing.

“We feel good about enrollment,” White says of student housing at tier-one flagship schools. “We still feel like that’s one of the best returns on investments that anyone can get, even giving the increase in tuition recently, we still feel good about the value proposition of an education at a tier-one school.  From an enrollment perspective, we’re comfortable with the outlook going forward.”

While most of White’s data referred to national figures, he did note that there are many markets that are still ripe for new development and investment opportunities.  One market in particular is in Knoxville, Tenn., near the University of Tennessee where there is a demand for development within walking distance to campus.  Even in these better-faring markets, White says that developers are often faced with having to develop communities with fewer beds in order to build on land closer to the campuses.

“The University of Tennessee is very transparent about the fact that they want more kids living closer to campus,” White says. “They want kids within walking distance to campus, they feel like that creates a more cohesive environment and kids have a much higher chance of being successful at their university. You’ll see in the next 12-24 months, a significant amount of new supply in Knoxville pedestrian-to-campus [housing], because in those cases you have a university that is basically pushing their students to adapt, while at the same time, you’ll see things like the cities doing things in order to make things easier for the developers to get things done that fit that profile.”

Looking ahead to 2015 and 2016, White sees a rise in the number of distressed student housing properties available due to the amount of loans maturing in the next two to three years.

“We’re likely to see some distressed deals in the industry that we’ve never seen before,” he adds.