SPECIAL REPORT: Student Housing Has Arrived; Institutional Investors are ‘Giddy’

By Erika Schnitzer, Managing Editor

Phoenix—The student housing market is healthy and booming, according to industry leaders at NMHC’s 2011 Student Housing Conference & Exposition.

The Great Recession has taught the industry that students will continue to go to college no matter what, noted Randy Churchey, president and CEO of Education Realty Trust and one of the panelists at the opening session, “State of the Industry with Student Housing Leaders.” Even if tuition increases, demand will stay the same, he added.

The market has also seen an increase in velocity, with institutions looking to acquire student housing, according to panelist David Adelman, president and CEO of Campus Apartments.

“Institutional investors are giddy about student housing,” agreed Bill Bayless, president and CEO of American Campus Communities. While there appears to be an overall sense of economic “doom and gloom,” institutional capital recognizes the resilience of student housing, he added.

As Peter Stelian, managing principal at Blue Vista Capital Management, pointed out, not much student housing was financed with CMBS loans, so there is not a “giant wave” debt coming due in this sector. He did add, however, that there are some “quiet things” moving, mostly due to inexperienced developers and/or managers.

The bifurcation in cap rates between conventional apartments and student housing is quite significant, added panelist Brian Dinerstein, principal of The Dinerstein Cos., with the greatest spread, between 150 bps and 250 bps, seen on new core product.

In fact, as Dinerstein pointed out, the market is constrained not by the capital markets but by compelling markets—location—as industry players target high barrier-to-entry locations and product.

As far as location, proximity to campus is essential and appears to be more important than product type, according to the experts. Mixed-use, however, garnered some debate; while it could potentially be more challenging, it can also be quite successful if done correctly.

As a final note, panelists were asked for their thoughts on the state of the industry at this time next year. The general consensus was that rents will have grown more and that there will be more transactional closings. Panelists noted that cap rates would either be the same or lower in the next 12 months.

Following this session, Andrew McCulloch, senior analyst at Green Street Advisors Inc. shared insight into how Wall Street looks at student housing.

While the sector had been viewed in an “Animal House” light in the early 2000s, that view has changed; cap-ex, though originally viewed as much higher than for traditional apartments, has been determined to be about the same for student housing. Furthermore, investors have seen that the sector has been somewhat recession-resistant. (In fact, as McCulloch pointed out, none of the public student housing REITs ever saw their revenue growth turn negative during the recession.)

“The sector has definitely arrived,” he told attendees, pointing out that Wall Street has learned that student housing drivers are different than those in conventional multifamily housing and that student housing is, in fact, what he called a “supply-demand sweet spot.”

Values are back to 2007 peaks, he reported, because demand is good and debt is cheap. In fact, he pointed out that asset values were past these peaks and posting all-time highs.