Student record

Student housing is growing on institutional investors’ radars, say InterFace panelists

Pictured is Carlton House, a 446-bed student housing development by Houston-based Treemont Partners that is nearing completion and will serve Texas Tech University students. Some industry experts believe rents for properties in major student housing markets like Lubbock have yet to peak and will continue to rise as more students target large public schools in the future. coming.

By Taylor Williams

As a multifamily subcategory currently experiencing record rental growth, student housing is increasingly becoming a sought-after commodity in the world of institutional investing, according to a panel of industry experts.

A more institutional love for student housing also comes at a time when concerns about the impact of COVID-19 on enrollment and on-campus learning at colleges and universities across the country have largely dissipated. The verdict is whether students overwhelmingly prefer to live and learn on campus – they do. The sources of capital react accordingly.

At France Media’s 14th Annual InterFace Student Housing Conference, held May 3-4 at the JW Marriott Hotel Austin (Texas), a panel of industry veterans presented on the drivers of growth of the sector on institutional radars. Over 1,400 student housing developers, managers, investors and lenders attended the event.

In affirmation of this trend, the “state of the industry” panel pointed to the $12.8 billion acquisition of Austin-based student housing developer and operator American Campus Communities (NYSE: ACC) by the real estate giant Blackstone (NYSE: BX).

Panelists hinted that this deal, which was announced in April and will make ACC private, serves as a watershed moment for the asset class for institutional investors. As such, the transaction, which is expected to close in the third quarter, is also expected to have a domino effect on the volume and type of capital entering the space.

“Institutions tend to follow institutions,” said panelist Ryan Lang, vice president of multifamily capital markets at Newmark. “When a company like Blackstone buys a $13 billion portfolio and takes a publicly traded company private, it creates a lot of confidence in the space as a whole. Blackstone is a very smart group that’s not going to make a purchase of $13 billion on a whim, so that should bring more institutional capital into the space.

Data is the engine of progress

Panelist Justin Gronlie, managing director of Chicago-based Harrison Street, noted that the student housing industry has now seen four publicly traded REITs go private in recent years, including the Blackstone-ACC deal. The execution of these mergers and acquisitions has brought to light more numerical data on the performance of the student housing market, further illustrating the viability of sector investments for skeptical sources of capital.

Now, however, with much of this consolidation activity over, there is less transparency across the industry in terms of compensation and averages for rents, sale price and other financial metrics. keys.

“For a long time, the industry really needed the data to show Wall Street and the broader investment community that student housing can be owned and operated by institutions,” Gronlie said. “We are now at a place where enough capital and investors have emerged and data is not mission critical. [growth of] industry.”

Panelists agreed that while consolidation within the industry at the hands of institutional investors has reduced overall data transparency, the emergence of new real estate technology platforms is doing a good job of reversing this trend.

Student-Housing-SOTU-Panel

The State of the Industry Panel at the 14th Annual InterFace Student Housing Conference, left to right: Ken Carl of Kayne Anderson; Newmark’s Ryan Lang; Cardinal’s Alex O’Brien; Isaac Sitt of Vesper Holdings; Donna Preiss of The Preiss Co.; and Justin Gronlie of Harrison Street.

“Data is streamlined and arrives in real time, which should help bring in more institutional capital,” Lang said. “The trend of massive consolidation and institutionalization of the space should continue given the opportunities for scaling, as well as returns from other asset classes, especially multi-family, to which we are the more often compared.”

Panelist Isaac Sitt, co-founder and director of New York-based investment firm Vesper Holdings, acknowledged there are still red flags in the space that could give institutional investors pause. Specifically, returns from the student housing sector are generally low compared to traditional multi-family assets.

Enrollment patterns are also shifting somewhat to favor larger higher education institutions, as well as smaller schools on the outskirts of major urban centers, he said. The demand for student accommodation in smaller schools in more remote locations is therefore considerably lower.

“We find that many kids want to attend large, flagship public schools or schools near major metropolitan areas,” Sitt said, citing Kennesaw State University in metro Atlanta as a prime example of this trend. “These schools are doing very well, but a lot of secondary and tertiary schools have fewer children who want to go.”

“Also, if you look at the demographic trends of young people turning 18 over the next 10 years, they’re not hugely favorable,” Sitt continued. “More of these children, as well as international students, will want to go to these great schools. So there are smaller markets that are suffering. »

Rising rents

Still, Sitt conceded that overall, the US student housing sector still has room for rent growth, which more institutional consolidation could facilitate. He also noted that his company’s portfolio was on track to see rent growth of 6% on an annual basis and that it was pre-published at 85% for the coming half-year, which represented figures records for Vesper Holdings.

” We went out [of the pandemic] aggressively, but not at the rates we are at today, and we rented very quickly,” he said. “So next year there will be room to continue to be aggressive. If we go out next year at our current rates instead of the rates we renewed last year, you are looking at massive rental growth next year.

“While ACC has always been a phenomenal operator, it hasn’t always been the biggest pricing pusher,” Sitt continued. “With Blackstone as a partner, they could be more aggressive on rental rates, which will also help support the market.”

Regardless of the asset class, a potentially higher ceiling for rental growth, on top of rates already at historic highs, is bound to attract institutional capital.

Donna Preiss, CEO of The Preiss Co., a Raleigh-based owner-operator, was among the first panelists to point out this rather basic appeal that student housing currently offers to the institutional world. Preiss also used his company’s portfolio, which includes some 33,000 beds in more than 50 markets, as an indicator of the performance of the industry as a whole.

“Our on-site occupancy rate is 96.2%, which is probably the best we’ve ever had in May,” she said. “We’re 86% pre-published, which has never been better. In 49 of our 52 markets, our properties are showing better results than last year, which is also a record proportion. And we expect double-digit revenue increases for 2022.”

Preiss noted that some of the revenue growth was attributable to the burning of tenant concessions, another factor that should serve to attract institutional investors. And while his company’s portfolio is also seeing record highs for certain expenses — payroll, repairs/maintenance, insurance — those costs are ultimately more than offset by rising rents.

“At the end of the day, the rental rates are so phenomenal, and when we consider that many of us see record speed behind those rates, we realize we could have pushed the rates even further,” Preiss concluded. “This means that next year, when we normally expect growth of 2.5-3%, we could budget for double that. And that’s pretty amazing.