demand. “All things are positive from a demand driver on the
student side,” he says. “But the biggest concern is when there’s a
surplus of capital out there, deals are getting done due to capital,
rather than demand.”
Speaking of capital, for much of the Great Recession and its
aftermath, Fannie Mae and Freddie Mac were willing to put money
into student housing projects that made sense. In other words,
projects that were owned and operated (and developed) by those
And with more capital out there than available assets, the
fully amenitized core assets—complete with all the bells and
whistles and are located near campus—are likely to drive up
the commercial real estate value. As such, “we’ll continue to
see cap rate compression, especially as interest rates remain
low,” Larimer predicts, adding that, as 2012 was a huge year as
far as sales activity, the total sold during 2013 will likely be
lower. Maturing debt will be a further factor down the line; the
Location Matters—To a Point
Student housing’s general mantra
has been that the closer it is to campus, the more successful the project.
In some cases, the housing is successful even before it comes online. As
an example, Epp says that Catalyst,
which is being developed by Chance
Partners LLC to serve Florida State
University in Tallahassee, is under
construction, and is, in his words “a
mudbath.” Scheduled to open in fall
2013, “kids have been coming in and
signing leases without being open,”
Epp says. The same situation is happening with Asset Campus Housing’s
Domain at Fayetteville, developed to
house students attending the
University of Arkansas. Despite the
fact that Fayetteville is becoming an
overbuilt market, this project—to
open this fall—is also attracting a lot
of students. “The kids are loving the newer, nicer stuff that’s a
unique product,” he says.
But things change once you get even a few miles away from
campus. The luxury products that aren’t adjacent to, or within
walking distance of, campuses are the ones that are starting to
see a drop in occupancy. “The expensive stuff that’s away from
the campus, not in that irreplaceable location—those are the
properties that are at the most risk,” Gates comments.
This is because kids who aren’t on or near campus are more
interested in value, rather than luxury. Developers entering
rural college towns and offering an urban high-rise product may
encounter some difficulties. “If you’re a student that can live in
a three-story, stick-frame luxury complex, I don’t think you’ll
want to pay a $200 premium to live in a commercial high-rise
product in that same market,” Bayless observes.
Yet the experts caution that it’s tough to make blanket statements when it comes to what will work in student housing and
what won’t. Ted Rollins, co-chairman and CEO of student housing developer and owner Campus Crest Communities Inc. says
student housing trends are vastly different between flagship
markets and smaller ones. The softness may not be quite so
prevalent in a place like the well-known University of Texas at
Austin. Anyone building or owning there, especially as close to
campus as possible, should do well. However, “not a lot of people may want to attend Midwestern State in Wichita, TX,”
Rollins says. In those locations, he notes, student housing properties won’t fill up as quickly.
Apartment Realty Advisors’ Student Housing Division recently brokered the sale of the Element in
Sacramento, which houses students attending California State University.
who knew what they were doing and who had a track record. These
days, there are other options for debt, such as the conduit markets,
life companies and pension funds.
Dinerstein allows that there is plenty of debt out there, as does
Larimer. “We’d like to see construction debt maybe a little less
available, but it doesn’t seem to be a problem so far,” Larimer
In fact, according to Chris Epp, co-director of Apartment Realty
Advisors’ National Student Housing Group in Austin, conduit
financing seems to be coming into its own. “We saw a group that,
two months ago, took down a building with a conduit,” he says.
“They weren’t strictly first-timers, but they weren’t seasoned either.”
Fannie and Freddie were interested, but as the conduit was more
aggressive, “the conduit won out,” Epp comments.
Gates sounds a more cautious note to debt and capital availability, pointing out that in late 2012, Fannie Mae and Freddie Mac
slightly changed up their lending policies. In short, the agencies
indicated they aren’t going to close many deals during the preleasing period, unless the lease rate is well on track or ahead of previous years. “They saw some softness last year between what was preleased and what actually delivered,” Gates comments.
Epp acknowledges this is the case, and one of the reasons why
conduit lending is starting to become popular. Buyers who need to
have a deal done immediately are not going to wait around for the
GSEs that might want to see a project 100% preleased before putting
money on it. So “while Freddie and Fannie continue to be your go-tos, we’re seeing an real emergence of conduit lenders,” he says.