Student Housing Review
Student housing remains at the top of the class
among investors. But a few factors, including new
development, shrinking cap rates and inexperienced
entrants to the sector, are potential threats.
From the perspective of its investors, developers and owners, the student housing sector seems analogous to the famed Energizer Bunny that keeps going and going and going. This
is because news from the educational front continues to be strong:
Enrollment is still high in institutions of higher learning, meaning
more housing for more students is required.
“The business has matured, which has brought in new players
and new capital. This is great, but it could lead to some more challenges,” notes Brian Dinerstein, partner and president of the
Dinerstein Cos. in Houston. Dinerstein Cos. develops student housing under the Sterling University Housing brand.
As such, say those in the industry, though student housing is as
strong as it’s ever been, there is a “but” in this situation. For one,
American Campus Communities, says that while ACC’s portfolio
hadn’t been impacted in 2012, there was definite softening in a
couple of markets.
Terrell F. Gates III, founder and CEO of Virtus Real Estate, a private company in Austin that invests in student housing, is somewhat
more blunt. “If you’d asked me about the strength of the sector a
year ago, I would have been moderately bullish,” he says. “But today,
I have a little concern about it.” These concerns involve potential
oversupply, higher valuation (and lower cap rates) and people jumping into the space with little or no operations experience.
In the investment arena, notes Kevin R. Larimer, Phoenix-based
Hendricks-Berkadia’s national director of student housing, things
are getting a little dicey. “From the demand perspective, there’s a
By Amy Wolff Sorter
surplus of capital purchasing student housing. On the investment
side, the market is more than vibrant; it’s almost frothy.”
Too Much of a Good Thing?
The picture painted by Apartment Realty Advisors’ 2012 Year-End
Student Housing Report is one of a hugely vibrant market. Sales
activity hit a record high in 2012 at $3.7 billion in total dollar volume, with cap rates headed on a downward trajectory. Meanwhile,
institutional funds and REITs dominated the class A space adjacent to campuses, while developers also jumped into the market.
According to the experts, not much will change in 2013 (though
the sales volume is likely to decline from 2012’s record amount).
Given this information, is overbuilding a concern? Are we seeing
a bubble when it comes to student housing valuations? It depends.
Specifically, it depends on the market and specific location of
the developments. Bayless says that during 2012, approximately
34,000 beds came on line, with 33% of those beds opening in
San Marcus, TX (Texas State University); State College, PA
(Penn State); Austin, TX (University of Texas-Austin) and
Statesboro, GA (Georgia Southern University). These are
becoming overbuilt markets, he explains, because there are few
barriers to entry and plenty of land available for construction.
Basically, “student housing is lucrative and can be successful if
you stay disciplined in terms of asset quality, related to proximity
to campus and interior submarkets, and are mindful of barriers
to entry,” Bayless points out.
But Larimer acknowledges a concern with these and other
markets. Namely, developers might be building to the amount of
capital available in the market, rather than building to meet