Why Landmark’s CEO Remains Keen on Student Housing Development
Wes Rogers on upcoming projects, industry challenges and expectations.
Wes Rogers, President & CEO, Landmark Properties. Image courtesy of Landmark Properties
With increased interest from both developers and investors, the student housing industry continued its stellar performance in the third quarter of the year, according to a recent Yardi Matrix report. As of September, some 130,000 bedrooms were in various stages of development at Yardi 200 universities, with almost 62,000 of them under construction.
Despite the cooling economy beginning to show its effects on student housing development, confidence in the sector remains strong. Landmark Properties, one of the largest student housing-oriented developers in the country, intends to grow its footprint in major university markets.
“We plan to continue smartly growing our student portfolio through both the development of high-quality assets in our target markets and buying existing assets in submarkets we like, at or below replacement cost. We also have significant dry powder to buy distressed assets as they present themselves,” President & CEO Wes Rogers told Multi-Housing News.
Here’s what else Rogers expects for the sector and why he remains optimistic about its performance next year, despite ongoing economic issues.
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How has demand for student housing properties fluctuated in the past couple of years?
Rogers: Going into the pandemic, the fundamentals for student housing were solid, and we were having our best preleasing year ever. When COVID-19 hit and universities started to shut down, we saw leasing velocity slow. Demand picked back up in late spring and summer but fall 2020 occupancies and rent growth were below the pre-pandemic trajectory. We ended up in the 92 to 93 percent occupancy range, with very modest rent growth. Several of our assets, specifically those in California, were bringing down the portfolio averages.
Coming out of the pandemic we’ve seen a bifurcation of markets. Publicly chartered four-year state institutions and large private schools with large endowments and enrollments have significantly outperformed smaller colleges and universities that are experiencing enrollment challenges. Many universities have budget holes to fill due to their financial losses during the pandemic, so they increased their acceptance rates modestly and are experiencing record enrollment. Only the universities that have modest acceptance rates have this luxury of managing their enrollment growth so easily.
Overall, enrollment is down at over 7,000 U.S. colleges and universities, but enrollment at the roughly 200 schools we target is higher than it’s ever been.
Please expand on how this dynamic impacted your business.
Rogers: We’ve not only seen record enrollment at the schools in which we operate, but we’ve also seen record incomes for guarantors and a continued change in preference by students for well-located, high-quality purpose-built student housing. This increased demand has also come at a time of moderating supply both off-campus and on. COVID-19 disrupted new off-campus supply while it also caused many universities to “de-densify” their on-campus housing stock.
The net result of all of this is that the student housing market is experiencing record operational performance. Landmark has just over $10 billion of assets under management, predominately student housing, and just under 60,000 beds. We are over 99 percent occupied and just filled our properties this fall at 7.6 percent rent growth, which are both records for us. We are already off to record preleasing rates for next fall, with many of our properties at or close to fully preleased for fall 2023. We are trending to see similar occupancy, with rent growth in the 8.5 percent to 10 percent range.
What are some of the hottest areas for student housing development in the U.S.?
Rogers: For student housing, I would say that pretty much any Tier 1 publicly chartered state institution is ripe for development if you can get the numbers to pencil.
How is the current economic volatility impacting your business?
Rogers: The incredible operating fundamentals—construction cost increases, supply chain issues, interest rates and concerns about cap rates—are making it increasingly challenging for new development. As such, we have shelved most of our market-rate apartment developments. Fortunately, most of our student housing and BTR deals are still moving forward given their higher margins and better fundamentals. With $3.7 billion in the ground, we’ve never been busier on the development front, as we are expecting over 20 new projects next year.
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What are the main challenges in securing financing for new student-dedicated projects today?
Rogers: Construction debt is, by far, the biggest challenge to getting new projects out of the ground. Many banks are on the sidelines right now and those that are lending are being very conservative. The resulting lower leverage and higher costs make new development even more challenging to pencil.
That said, our focus is on clubbing banks together and leaning into our deep banking relationships. Times like these are when relationships and experience really matter.
How have rising construction costs impacted student housing development so far, both across your company and on a broader, industry level?
Rogers: Construction costs are a huge challenge right now. Fortunately, the fundamentals in student housing are very compelling and there’s more cushion in our student deals so they’re still getting done.
That said, we are having to spend a tremendous amount of time on design and buyout to hold our pricing. Currently, we are seeing student housing rent growth outpacing construction cost increases, so our development yields have slightly increased in the face of higher rates. Having our own internal general contractor has never been more valuable than it is today as it gives us much more clarity and control over costs and design, which enables us to deliver the product at the best price. Many third-party general contractors are high-bidding jobs now, given all the volatility in the market.
Please share a few details about your focus markets and what makes them attractive for development.
Rogers: Landmark is focused on publicly chartered state institutions with enrollments of 15,000 or more and a select few private universities with large endowments and significant off-campus student populations. Demand to attend these universities has held up and grown during both the global financial crisis of 2008 to 2010, as well as during the pandemic. While finding and entitling land in these markets isn’t always easy, if you can build a well-located, high-quality project, your long-term cash flows should be very stable.
What are some of your largest student housing projects currently under construction, and how many of them will be completed over the next 12 months?
Rogers: The average size of our projects has certainly increased over the last several years. We’ve seen an outperformance in our largest assets, generally due to the value that we can provide by having operating efficiencies at scale, while also targeting more major MSAs—versus lower-cost college towns—than we used to.
The Standard at Seattle, The Standard Bloomington, The Standard at College Park and the Mark at Austin are four of the largest of our 10 deliveries for fall 2023. Each one of these is roughly 1,000 beds or more. We also have several large projects slated to be delivered over the next several years, including projects in Los Angeles; Berkeley, Calif., and Philadelphia.
Does Landmark plan to break ground on any new projects soon? If so, can you share some details about the new developments or at least the areas you’re targeting?
Rogers: We just broke ground on two single-family build-to-rent projects in Texas and Alabama and have another three to four build-to-rent deals scheduled to start by year-end.
We also have six student starts planned in the coming months, highlighted by our development at the University of Connecticut.
What are your expectations for the student housing sector in 2023?
Rogers: I expect to see record fundamentals for the second year in a row in 2023. As an industry, I imagine we’ll see record rent growth for fall 2023 and similar levels of high occupancy that we are currently experiencing.
The Fed’s overreaction will likely cause a lot of pain in the broader economy, so while the operating fundamentals for student housing should be better than ever, I expect the capital markets to create not only broader pain but also some new opportunities. I imagine higher rates will result in many projects getting shelved, further limiting supply, which should set student housing up for a great run of operating performance. I imagine development costs will come in and margins will improve sometime in 2023 as subcontractors and building suppliers must adapt to less demand.
