Aside from burgeoning student enrollments, many colleges and universities are dealing with the fact that a significant portion of existing student housing facilities, both on and off campus, are functionally obsolete. Some haven’t been updated or improved since the 1960s or 1970s, while others are not configured to today’s students’ standards and expectations. (What? We have to share a bathroom? We have to plug into the Internet?) And, increasingly, the quality and availability of student housing is playing into students’ school selections.
At the same time that some schools are investing in or supporting new student housing development as a way to maintain a competitive edge, many student housing firms are eagerly pursuing new development for different reasons. Given the cost of debt capital in today’s low interest rate environment, new development can end up being a better deal than an acquisition or value-add play. In addition, newly developed properties can help boost a portfolio because, in general, new product performs better-at least for the first few years. As one executive put it, there’s a “new-car smell” effect that happens with new properties; there’s buzz and students want to live in the freshest, coolest housing facility-and they are willing to pay for it. Many student housing firms find rents at newly constructed properties come with a premium and that the properties lease up quicker.
However, one of the most significant limitations to new student housing development is site availability. Everyone is searching for that infill piece less than a mile from campus. Prices for those prime sites are also on the rise. This combination of location and price is driving student housing developers to crank up densities, when possible, and many industry executives expect to see more high-rise development going forward.
That’s not to say that townhome or cottage communities, typically located one to two miles from campus, are totally dead. The product in these communities tends to offer features such as en-suite bathrooms or private outdoor space (think porches or decks) that many students want. Wes Rogers, president and CEO of Landmark Properties, says two-thirds of the company’s pipeline is cottage deals; however, he cautions that the company’s product mix is likely to change going forward because good sites are getting harder to find every day.
But one thing that is changing across the product spectrum is that community clubhouses are going much higher end. (Click here to view a presentation with some great examples.) Beyond just pools, apartment developers are adding unique sports and entertainment facilities such as racquetball courts, upgraded fitness centers and even spa amenities like mani-pedi stations. Consequently, development costs are rising. Rogers said his company used to build clubhouses for roughly $95 a square foot, but with the added amenities, it’s closer to $130 a square foot now.
The uptick in new development activity is giving some industry executives a little heartburn as they evaluate demand against the pace at which new supply is coming to market. One executive estimated that there were 3,500 new units currently under construction; more concerning are the number of approved but not-yet-started projects that could add as many as 10,000 additional new units to the student housing supply.
Education Realty Trust’s Churchey agreed that the supply was perhaps just a little lumpy. “2012 looks like supply might be a little ahead of demand, but 2013 and 2014 might look like equilibrium,” he said.
However, Nathan Collier, chairman of Collier Companies, was more certain in his diagnosis of a supply-demand imbalance. “I see a consistent cycle of overbuilding,” he said. “I’ve been in the market for 40 years, and I’ve never seen a 10-year period without an economic downturn in it. But in the past 10 years, I’ve never seen a pro forma with one in it. The math just doesn’t work.”