The investment sales market for student housing has moved past a period of recovery and into a period of sustained activity. Sales volume in 2011 exceeded $2 billion, with new investors and new product entering the market. Low interest rates and increased demand have also kept cap rates down. These factors are expected to continue throughout 2012, giving the market the potential to perform even better than last year.
"The student housing sector experienced a stellar comeback in 2011, posting nearly $2.4 billion in sales volume for the year," says Peter Katz, senior vice president of investments with Institutional Property Advisors (IPA) in Phoenix, a Marcus & Millichap company. "This represents a 53 percent increase over 2010, with some of the largest transactions occurring in the fourth quarter of 2011, for a volume of $979 million."
According to Brian Kelly, managing director with HFF in Chicago, publicly-traded REITs and private equity funds accounted for much of the student housing sales volume activity in 2011. "We experienced the emergence of several new equity investors attracted to the sector by documented, strong performance and higher yields relative to other product types," he says. "Increased demand coupled with lower interest rates produced downward pressure on cap rates."
Chris BancroftThroughout 2011, Apartment Realty Advisors (ARA) saw the pricing for all types of product continue to rise, along with transaction volume.
"We saw a marked increase in student housing investment sales nationally, more product brought to market than we have seen in a number of years and an overall increase in student housing demand," says Chris Bancroft with ARA in Austin, Texas. "Investors are focused on the fundamentals more than ever — location, supply, demand and barriers to entry."
As for the first quarter of 2012, sales volume looks to be on par with the same period of last year. In some markets it is a little slower than in years past, but the numbers are expected to surpass those of 2011 by year end.
"This year is getting off to a similar pace as 2011 and I would expect that the end of 2012 will show an increase in transactions," says Dorothy Jackman, managing director with the national student housing group at Colliers International in Clearwater, Florida.
Adds Kelly, "The first quarter of this year is on track with 2011 velocity. Given the abundance and low cost of capital, we expect 2012 transaction volume to be at the same level or higher than 2011."
Bancroft has seen a limited amount of product brought to market so far this year, due to the fact that some sellers are waiting until pre-leasing velocity increases near the start of the school year, enabling them to capitalize on the fall rent roll. "We are seeing a handful of trades that are carry-overs from late 2011," he says. "Owners and developers are curious to understand property values and as such, we have seen a sharp increase in requests for proposals and opinions of value. We would expect to see more product brought to market in summer/fall 2012 than we did same time last year."
At IPA and CB Richard Ellis (CBRE), brokers are also seeing numbers slightly below those of first quarter 2011, but both firms expect to see an upward trend in sales numbers as the year progresses.
Says Katz, "So far, the first quarter of 2012 has posted approximately $213 million in sales and is slightly off the pace set last year. However, this shouldDorothy Jackman not be seen as an indication of the direction of the market as there is significant capital seeking both opportunistic yielding value-add properties and core, Class A assets in the space.
The majority of transactions occurring since the beginning of the year are somewhat smaller in size compared to the previous quarter, averaging $10.2 million per transaction. By comparison, assets that closed in the 4th quarter of 2011 had an average transaction amount of $29.7 million."
Adds Ryan Reid, national director of student housing with CBRE in Dallas, "We will certainly see less trades in the first half of 2012 compared to the first half of 2011. Seventy-five percent of the transactions in the first two quarters of 2011 were from properties brought to market during fall 2010. We did not see a large overhang of properties still on the market going in to this year because most of the properties cleared the market in the fourth quarter. We believe 2012 will be potentially more active than 2011 because transaction activity is well below the peak and we are trending more with 2005/2006 levels."
Buyers run the gamut in the current market. Everyone from institutional clients, private capital investors, equity funds and REITs are buying and they are looking at all types of product. Many investors are quite aggressive and actively chasing deals.
As usual, tier one product is still in high demand, but at the other end of the spectrum, distressed properties are still sought after by a number of investors.
"Markets vary, but in terms of what most are looking for, it is institutional-grade property within walking distance to a tier one school," says Tom Trubiana, executive vice president and chief investment officer with EdR in Memphis, Tennessee. "There is also popularity in turn-around properties."
"The buyer profile for student housing remains fairly diverse," says Bancroft. "Private sources of capital make up the largest segment of the buyer pool. Institutional investors continue to return to the industry and chase after core, walking-distance properties at the most aggressive yields. REITs have been active on both the acquisition and development fronts, remaining focused on strong market/asset fundamentals. New sources of capital continue to enter the market, chasing after the higher relative yield that student housing offers when compared to other commercial real estate sectors, particularly the conventional multifamily industry."
Jackman has also seen a variety of buyers at the moment. "Institutional clients and private clients have raised additional funds earmarked for various types of investments, making their focus and appetite more diversified," she says. "In terms of what they want, the short answer is a good deal in a good market. Class A in tier one markets and well-located assets are still very much sought after. However, value-add plays in good locations and tier two markets are also on the radar of a significant number of investors."
Kelly has received the most interest from private capital investors, equity funds and publicly-traded REITs. "Many of the new firms pursuing student housing have opportunistic acquisition strategies," he says. "Additionally, a few well-known private equity firms recently announced new funds targeting core assets in tier one markets."
Tom TrubianaReid has found that property type is the determining factor in the type of buyer active in a market. "All buyer types are active at the time, but the more prevalent buyer types are a result of the type of properties listed for sale," says Reid. "For instance, we listed a core, walking-distance deal in a major MSA in January. The institutions are actively chasing this deal. Whereas the deal we have on the market at a secondary state school in California will have a much larger pool of interested private buyers."
Every area of the country has locations that are considered more desirable than others and segments that appeal to different investors. In general, however, areas with high barriers to entry, limited new supply and a good location near a tier one school are almost always considered 'hot.'
"High-end, upscale developments that are purpose-built, pedestrian to campus at tier one universities will remain in high demand, especially those within major MSAs," says Katz. "Student housing has become a more desirable niche within the multifamily space as it provides risk-adjusted returns higher than conventional market rate apartments. As such, we are seeing new buyers with fresh equity enter the sector and we'll see many of these investors acquire numerous assets this year."
In addition to the more obvious hot spots, there are a number of other markets that are considered desirable. These include secondary and tertiary markets, as well as distressed properties.
"Turnaround deals in less desirable markets may garner the same if not more interest than markets with strong fundamentals as long as there is a good story and significant upside in the opportunity," says Bancroft.
"Secondary universities such as Texas State, Sam Houston State, Texas Tech and University of North Texas that are growing exponentially as a result of the University of Texas in Austin and Texas A&M having stunted growth are attracting capital for both development and acquisitions," adds Katz.
Private sellers, REITs, banks and developers make up the largest percentage of sellers in the current market. Favorable financing and increasing demand are spurring owners to sell their product.
"Developers, institutional clients, and private clients — you could say this is both a buyer's and seller's market," says Jackman. "Of course, the motivation for any disposition may vary whether it is to rotate inventory, the investment has reached a targeted return level for the investors or the developer divests as part of their normal strategy."
Adds Bancroft, "Private sellers and REITs made up the largest segment of the sell-side, followed by developers. We expect to see an increase in sales by developers in 2012 due in part to the increased demand we expect from institutions."
Debt maturity is also a large factor for many sellers in the current market. A number of sellers are expected to bring product to market in the second half of the year.
"The sellers this year will be owners facing some form of maturity, either debt on the property level maturing or equity partners driving the decision to sell because they are nearing the end of their hold period," says Reid. "We also expect developers to be active in the second half of the year."
Adds Katz, "Developers have been extremely active in selling assets that have just been completed, with little to no operating history, at historically high prices per bed. REITs have and will be active sellers to demonstrate to Wall Street that they are recycling their capital or portfolio pruning. Debt maturities or solving excessive capital stack issues will contribute to the number of transactions that close at lower prices per bed in 2012."
2012 And Beyond
Most brokers and investors expect cap rates to remain the same for the rest of the year. Steady rates, strong fundamentals and increased capital flow will bode well for the student housing market throughout the remainder of the year and into the next. Positive growth and strong activity are also predicted for the next couple of years.
"Student housing wasn't as affected by economic downturns as other areas, and all indicators look positive," says Trubiana. "Capital is available, but mainly for those with a good track record. Hopefully the market won't get overly hot with overbuilding again."
"We anticipate another very active year on both the buy and sell side," says Bancroft. "Institutional interest will remain strong and we expect to see more high-profile opportunities brought to market. Transaction volume is expected to reach or meet 2005 levels and the current favorable interest rate environment will ensure continued interest from leveraged buyers. Cap rates are expected to remain fairly flat for the coming year with no lack of interest from the investment community."
Reid believes that 2012 transaction levels will surpass those of 2011 and development will start to pick up. "We also believe cap rates will remain flat and we will not see upward trends in the interest rate environment," he says. "This, coupled with strong fundamentals, will drive pricing levels upward and ultimately we will see more new development."
Kelly also predicts that development will restart in some areas and that there won't be much movement in cap rates. "However, I do expect to see the cap rate spreads between primary and secondary markets compress as heightened competition forces investors to tier two schools in an attempt to achieve yield targets," he says. "Assuming the economy continues its recovery, we are likely to see increased development relative to recent years as construction financing becomes more readily available."
"This will be a banner year for core and value-add transactions within the investment arena of student housing," says Katz. "It would not surprise our group at IPA if the market cleared $3 billion in trades. However, some of that allocation may be in the form of pre-sold or mezzanine-loan-own transactions by core players. With the cost of capital near record lows, many investment groups seeking opportunistic yields will be extremely active within the sector as this window remains open and while fixed rate, 10-year debt hovers at 4 percent to 4.25 percent."
— Lara Fuller