Patterns related to off-campus student housing development have shifted, with value-add development increasingly seen as an attractive option. But how can investors take the next step?
Ironically, it was the Great Recession that set off the greatest expansion in off-campus student housing since the beginning of the century. According to the U.S. Department of Education, enrollment at degree-granting postsecondary institutions surged by 16 percent between 2007 and 2010, as students of all ages saw a college degree as an essential hedge against unemployment. With universities around the country — especially flagship state institutions—cutting their budgets, higher education turned to the private sector to house more of their expanding student body. Developers responded readily. In 2013 and 2014, inventory growth of purpose-built student housing hovered around 10 percent, according to Axiometrics.
Fast-forward to 2018, and the campuses of major universities around the country are ringed by new mid- and high-rise student housing. For instance, College Station, home of Texas A&M, has seen the delivery of 13,700 beds since 2011, according to Axiometrictic figures, including deliveries expected in 2018. Meanwhile in Tallahassee, slightly under 13,500 new beds have been constructed along the perimeter of Florida State. While the sheer volume of deliveries at these two schools makes them outliers, the sharp uptick in growth of the segment reflects mounting interest among institutional investors, including sovereign wealth funds and pension funds. They have noted that the new amenity-rich, professionally managed complexes can produce comparable to higher returns than conventional multifamily housing, while also resulting in a potential hedge during recessions.
Applying this insight, however, has become increasingly difficult. Because campuses tend to become denser as enrollment grows, rather than larger, the boom in student housing has resulted in fewer easily developed sites within walking distance to campus—and available sites sell at a premium. At the same time, there is some worry about the depth of demand at the top of the market. High-end purpose-built student housing product continues to perform exceedingly well, but unlike conventional multifamily product, there is no demographic metric that addresses affordability for students; hence, the ongoing dialogue about the depth of the high-end student renter.
In other words, developers can no longer expect to make up for high land prices by adding amenities that justify high rents. For many investors, the way out of this conundrum is value-add. Increasingly, they are turning to older student housing properties, offices, and even parking garages. They are renovating or even reconfiguring them with the kind of floorplans and amenities that appeal to the current generation of students and their parents, and offering them at lower, more competitive rents.
There Is No One Value Add Recipe
There have been a number of value-add transactions already in 2018, running the gamut in size and significance. In Texas, for instance, RedBridge Capital and Juniper Ridge Partners acquired a 218-bed community near the University of Texas at Arlington and a 165-bed community located near Texas Christian University in Fort Worth, both of which they plan to renovate and move up-market.
On a much larger scale, value-add was one of the attractions that led Scion Student Communities—the joint venture of the Scion Group, GIC of Singapore, and Canada Pension Plan Investment Board—to purchase a $1.1 billion, 13,666 bed portfolio of 24 properties in 11 states. Robert Bronstein, Scion’s president told Student Housing Business that “we’re planning on the most in-depth value-add rehabilitation that we’ve ever done in the history of our company on some of these properties.”
Nelson Brothers, a Capital One client, has long been an advocate of the valued-added approach to student housing. The company demonstrated its belief in the potential of renovated properties when it purchased The Mark, a 1970s-era student housing community, just a four minutes’ walk from Arizona State. The previous owner had just completed a renovation that included an all-new fitness center, study lounge, and sun decks in addition to quartz countertops and stainless-steel appliances. This fall, Nelson Brothers purchased The Element, a 792-bed community a 15-minute walk from California State Sacramento. Similar to The Mark at Arizona State, the prior owners of The Element significantly upgraded the interiors and community space at the project.
Experience Is a Differentiator
Given the maturity of student housing markets at major universities, a value-add project is a great way for investors to secure advantageous cap rates and higher returns. At the same time, these projects are inherently more complicated than ground-up development. Investors must have the skill set, experience, and resourcefulness to address complications as they arise, while preserving the project timeline needed to ensure lease up before the start of the academic year.
Because value-add projects are not cookie-cutter deals, identifying a financial partner who is similarly resourceful and experienced is an imperative. Lenders must bring to the transaction an established commitment to student housing finance as well as a flexible array of products, all of which is so important to making these one-of-a-kind transactions work.
— John Hope is senior vice president and south market manager at Capital One’s Commercial Real Estate Group. Joel Willard is senior vice president at Capital One Multifamily Finance.