Long considered the little brother to traditional multifamily, the student housing sector is looking much more grown up these days. All anyone needs to do is look at how student housing cap rates recently dipped below those in multifamily to see that the once-niche sector has grown into a full-fledged asset class of its own.
According to executives at the 2016 NMHC Student Housing Conference and Exposition, investors now fully recognize student housing as its own investment animal, as evidenced by the record amounts of capital flowing into the sector and sky-high transaction volumes. Opportunity in other sectors is limited, and economic uncertainty around the world weighs heavily on investors’ minds, making student housing’s reputation as being somewhat recession resistant very attractive.
“What really attracts them to our biz is the stability of cash flows,” said EdR Chairman and CEO Randy Churchey during a panel discussion. “When you remind investors that when the economy goes into a recession, enrollments go up-a lightbulb goes on in their heads.”
While it’s a bit of a mixed bag when looking at enrollment trends two-year colleges, four-year private institutions and for-profit colleges, enrollment trends are solid for larger, four-year public universities-and should remain so for some time into the future. In fact, according to Axiometrics’ data on 175 of the top four-year public and private universities, enrollment trends for this class of institution only experienced negative enrollment in one period since the 1990s, and that was in 1993-1994.
“I think we are still very early in the cycle,” said Bill Bayless, CEO and president of American Campus Community. “All of our holdings are just scratching the surface in terms of market share.”
This bullish outlook is driving many student housing firms into expansion mode. Churchey, for one says his company has been focused on growing through both acquisition and new development. “We’ve increased total gross assets by 40 percent in the last year,” he said. “And we expect to be able to do that next year, too.”
Indeed, fueled by capital interest from both domestic and international investors, transaction activity has been hot. Last year was a record year in terms of transaction dollar volumes, as well as the number of properties and portfolios traded and transactions completed. But through the first half of 2016, the sector appears to be on track to eclipse even those levels by the close of the year-thanks in part to the close of several very large transactions, including Harrison Street Real Estate Capital’s $1.9 billion acquisition of Campus Crest and The Scion Group’s $1.4 billion purchase of University House Communities.
“There’s been a ton of money that’s come into this space-both new money and existing folks,” said John Preiss, chief investment officer for The Preiss Company. “I’m seeing that deals are really hard to win. You have to be aggressive on them early. And when they do go under contract, they don’t recycle back out. In the past, if we didn’t get there on the price, we’d get a call back later. Now when a deal goes under contract, it closes.”
However, with a lot of capital chasing deals and driving up prices and values, student housing executives say that yields are being compressed. For example, whereas some companies used to be able to deliver cash-on-cash returns in the mid-teens, now they are low teens and under more pressure all the time.
While lowering return expectations can be an acceptable tradeoff for actually getting a deal done, some executives are finding that when they “double click on a deal,” as one executive put it, the underlying assumptions are questionable given the uncertainties in the market.
“You see people making investments in the space that people who know the sector are kind of rolling their eyes at. The level of underwriting is in my opinion a little bit dangerous,” said Harrison Street Real Estate Capital President and CEO Christopher Merrill.
However, others have a more moderate view of the transaction climate. “It feels like things are little more frothy than they really are,” said Brian Eby, senior director of transactions and financing for TIAA-CREF. “Clearly the sector was under invested. So, I think there was some pent-up value to be caught up.”