The student housing sector’s solid fundamentals and positive outlook continues to gain the attention of capital sources. Both debt and equity are widely available as traditional sources of capital mix with newly available debt and equity vehicles. More institutional players are active and a lot of foreign capital is coming in through them or directly through joint ventures with local operators. Similarly, well capitalized, large homebuilders and military housing contractors are also entering the space.
This long line of capital is searching for yield, which is reshaping the definition of opportunity in the market. “There’s been a ton of new capital come into the space and it’s changed the space in a very large way,” said Ryan Lang, senior managing director of ARA, during a session at the 2015 NMHC Student Housing Conference & Exposition. “There are still opportunities out there, but it’s a new game.”
Prices are rising and cap rates are compressing, so there’s been a shift from acquisitions to development as investors look to deploy funds more efficiently. Similarly, those looking for acquisitions are in search of portfolio versus single-asset deals.
Value add is also taking on new meaning in the market. With so many active players, projects are being priced as if the value-add work was already executed. The higher valuations start to eat into the amount of capital a buyer can put back into the asset and still achieve the desired returns.
Jaclyn Fitts, national director of student housing for CBRE, said figuring out what kind of physical or operational improvements to make depends both on the capital investment strategy as well as the end buyer. In some cases, “you need to leave meat on the bone” in terms of improvements still to come while “there are cash-on-cash buyers who don’t want to do the heavy lifting,” she explained.
So, many student housing firms are looking to create value operationally, improving net operating income (NOI). During a different conference session, Brian Shirken, principal of Columbus Pacific Properties, said, “A lot of older properties aren’t professionally managed, so there’s a lot of operational efficiencies to be had. This allows you to significantly reduce risk while delivering development-type returns.”
But many times, investors are willing to give on yield just to get a deal done. “There’s a global search for yield ... and any yield is an attractive yield. ... A lot of money is coming to the space late and a lot will not achieve the returns anticipated. But these people will accept lower returns if that’s how it shakes out because it’s better than investing other places,” Shirken said.
Loren King, CEO of Trinitas Ventures, added, “While all the low hanging fruit is gone, there are a lot of opportunities. But they are complicated, they are hairy and they take a long time. ... But if you can get one, they are worth the valuations. We’ve got competition and so we have to adjust to that being the new normal.”