Austin — The conference welcomed top industry leaders, nearly 900 attendees and more than 50 exhibitors.
Austin — Is there too much student housing? How are companies dealing with rising construction costs? Is college enrollment rising sufficiently to meet growing supply? Where are the funding sources that will continue building lavish student properties? Where is the purpose built student housing for young people who don’t have a lot of money to spend on rent?
These and many other questions and topics pervade the student housing industry, primarily in the off-campus environment, as it expands from a small niche to a sector of commercial real estate that’s attracting institutional capital from large pension funds, endowments, foundations and other sources looking for an inflation-resistant place to grow dollars for tomorrow. REITs are consolidating, and new players enter the space more often every year. The three-day InterFace Student Housing conference in Austin, Texas, tackled many of these subjects on the minds of owners, managers, investors, brokers and all manner of support-industry leaders with a stake in grooming and growing student housing conscientiously.
The first panel of InterFace Student Housing pulled leaders from top companies into a “no holds barred” discussion about the state of the industry. Moderator Tim Bradley, founder of TSB Capital Advisors, posed several questions about financing and supply, leading off by asking the three public REITs why they’ve been on the sidelines recently, not acquiring as much as in years past.
American Campus Communities President Bill Bayless pointed out that ACC is still doing one-off acquisitions as it’s slowly integrating the 19 properties it acquired from Kayne Anderson Real Estate Advisors in October 2012. ACC also acquired 15 properties from CA Student Living/CA Ventures that same year. Randy Churchey, President and CEO of EdR, said his company has been focused on cycling sold assets proceeds into new development.
Ted Rollins, co-founder and CEO of Campus Crest Communities, said a year after absorbing Copper Beech, the firm is planning approximately $250 million in development in the next few years, including some new Copper Beech product.
Bradley asked Al Rabil, managing partner of Kayne Anderson Real Estate Advisors, and Chris Merrill, co-founder, president and CEO of Harrison Street Real Estate Capital, what’s driving private equity plays these days. Rabil explained that KAREA, for example, targets an 18 percent to 20 percent return, with debt in the 4 percent to 5 percent range.
“We are agnostic to acquisition versus development,” he said. “Acquisition makesmore sense because we get cash flow, but virtually everything that fits our parameters lately has been development. But it’s becoming more difficult to find developments that make sense due to rising construction costs.”
In response to the same question, Merrill said that Harrison Street, in business for more than eight years with involvement in approximately 100 different investments with about $3 billion focused on the student sector, looks for repeat business with skilled operators.
“We have various buckets of capital that are set up like an evergreen structure, looking for good quality assets.”
Rob Bronstein, president and co-founder of The Scion Group, offered that there’s never been more interest on the part of capital, but capital is struggling to find quality operators.
Bradley asked Rollins for advice he’d give to new developers, having built up the company’s Grove prototype some 51 times over. “For us, this is a nuts and bolts business in the markets in which you operate,” Rollins said. “Each time, we’ve tried to spend a lot of time underwriting each transaction, taking into account all the unique details of a particular municipality. Don’t fool yourself that just because you’re the new guy, you’re always going to get the rent premium. It’s a roll-up-your-sleeves and operationally intense business. For new folks going into markets for the first time, it’s all about focusing on the basic business, the underwriting metrics and understanding the universities. Details are very important.”
Adding to Rollins’ comment about student housing being so operationally focused, Bronstein said, “As a buyer, you’re buying a business more than you are a piece of real estate. There is a disruption of transitioning an operating business. We’ve gotten more picky about the exact time of year [we acquire], and we’ve learned that it’s not appealing to buy from a seller who doesn’t make that transition smoothly.”
The panel also addressed oversupply, saying the consumer press has, for the most part, misrepresented the issue of too much development and not enough demand. “New supply doesn’t mean oversupply,” responded Bayless, who later addressed conference attendees on this topic in greater detail during his keynote speech, in which he discussed how student apartments, across the spectrum, are in need of modernization as purpose-built collegiate housing becomes more well known and popular among parents as well as students. He used Austin, Texas, a city many have said is overdeveloped, to explain with figures that all existing product, new and old, has been completely absorbed in a market where the university’s enrollment has remained at around the same figure (50,000).
“I agree with Bill about modernization,” Churchey said. “About 50 percent of the supply that’s out there is still what we’d affectionately refer to as ‘student ghettos,’ where the investor probably hasn’t seen the property in three or four years, so 50 percent of students now want to live in purpose built student housing that’s being constructed.”
Rabil somewhat disagreed with this assessment, saying that interest rates are artificially low, which forces investors into a risk on a trade and makes deals look better from a long-term perspective because they are debt driven. “At some point, the music will stop,” Rabil said. “And if you’re looking for developers to show restraint, you’re probably looking in the wrong place. When the music does stop, there will be too much development.”
In a panel later in the day, the subject of whether there was too much development focused on the upper few percentages of students who can afford high rents was presented. Moderator Peter Katz, senior vice president of investments for Institutional Property Advisors asked his panelists, how is the industry different today than it was five years ago?
“Five years ago, our product was not what it is today,” said Bob Clark, president ofPeak Campus. “Virtually every product being delivered today is the equivalent of delivering a Ritz Carlton to that market. No one is delivering a Courtyard or a Fairfield. That’s putting pressure on the upper limits of what the student body can actually afford. We’re going to see developers figure out product diversity instead of Ritz Carltons everywhere.”
Others commenting in various sessions throughout the conference noted that wireless will be a standard at every property, regardless of the rent range, and that online leasing, renewing and more will be significant to the industry as it continues to attract more international students and seeks to tighten expenses and man hours in leasing offices.
Chris Merrill of Harrison Street brought up a topic commonly heard at conferences that new players in the student housing world are a negative thing. “I view it as positive,” Merrill said. “A real market has developed. To me, that means there is less risk. In a less risky market, there is lower return that one should expect. People are going to make mistakes like they do in every other market, but that only creates real opportunity for those who know what they’re doing. Institutional pension fund capital is going into real estate. It’s looking for a yield that is protected from inflation over the years. A lot of pension funds, endowments and foundations are adding student housing to their wish lists.”
Rollins also echoed a note of optimism in response to the question of whether the market is overbuilt. “We serve the American education system,” he said. “Demand is there. You have to focus on that, and mom and dad want their children to live in this purpose built student housing. Fifty percent are living in substandard housing, so it’s a long-term focus. It’s not a one-year type of thing.”
Leasing And Marketing
Later, a panel of operations experts met to discuss leasing and marketing. The panel was led by Kim Cory, director of student media, For Rent Media Solutions. The session displayed how some of the development and investment topics mentioned prior play out in day-to-day operations on the site level. Product differentiation, for example, is an explanation many companies source for profitability among students. According to David Neef, COO of Innovative Real Estate, a four-bedroom, four-bathroom floorplan that is traditionally difficult to lease has a greater chance of getting rented if it offers a unique floorplan. “We get as creative as possible,” he said. “A split-level four for example widens the spectrum for a person who is price sensitive. And if there is a kitchenette upstairs, it will lease up faster than our flats.”
Landmark Properties is currently 84 percent pre-leased, the leading figure in the industry so far. Innovative is at 56 percent, ahead of last year, but Neef also noted there is leasing velocity typically later in the cycle. For most, there are approximately 19 weeks remaining in the current leasing cycle.
The topic moved to amenities and brand appeal, where each panelist agreed that thinking outside the box is of utmost importance in success today. Neef said the days of competing on amenities are long gone because all properties offer impressive amenity packages nowadays, so the focus is on the diversity of amenities.
Del de Wendt, CEO of Cardinal Group Management, a firm with a young personality,recently deployed a converted FedEx truck into a mobile leasing center, added that standing out is one of the most important ways to secure leases. “We won’t have 15 golf simulators, but we focus on building our campaigns around one unique aspect of our properties, whatever it may be.”
The topic that elicited the most enthusiasm from the panelists was a discussion about personnel and human resources. EdR COO and senior vice president Chris Richards said EdR recently rolled out a new way to hire and compensate leasing managers. “We looked at turnover in on-site staff and discovered that maintenance managers turn over 12 percent, but the leasing and marketing manager — the person who’s running the show and locking down the sale more than anyone — is turning over the at a rate of 67 percent. We redefined the salary, set new hiring criteria and empowered that position. They are now highly compensated with a great salary and given the respect they demand, and it’s completely changed our dynamic.”
De Wendt concurred: “Sometimes we overcomplicate things, he said. “This business is customer service.”
Neef responded saying customer service is more important in student housing now than it ever was. “The customer service bar used to be low compared to market rate apartment management or the hospitality industry because it used to be that if you built it, they would come. But with the integration of social media, our business has become more transparent than ever. We’ve instituted a targeted customer service campaign and as a direct result have seen a 9 percent increase in renewals across our portfolio.”
More than 100 entries were received for the 21 Innovator Awards. The awards are given to projects that were completed between Jan. 1, 2012, and Dec. 31, 2013, in various categories on- and off-campus. The last award of the evening is always reserved for the best new off-campus development with 200 beds or more. The winner this year was CORE Campus, for its development of The Hub on Campus, which was completed in July 2013 and sold for $103 million to Inland American Communities in August 2013. The 637-bed, 19-story urban-style and high-end community was subsequently rebranded University House Tempe. This project also won an award for Best Architecture Design, Greater Than 200 Beds.
On-campus, the best new development project was awarded to EdR for 2400Nueces at the University of Texas, Austin.
The rest of the Innovator Award winners were
Best Architecture and Design: Design Collective, Inc. for Livingston Campus Living Community at Rutgers University
Best Use of Green/Sustainable Development: Hastings + Chivetta Architects for Deep Green Student Housing at Berea College
Best Renovation of Existing Dorm or University Housing: University of Cincinnati for Morgens Hall renovations
Best Public-Private Development: EdR, 2400 Nueces
Most Creative Public Private Financing: American Campus Communities, Manzanita Hall at Arizona State University
Best Implementation of Mixed Use in New Development or Renovation: American Campus Communities, Chestnut Square, Drexel University
Best Vendor/University Solution: EdR, 929 – Fiber Optic Link
Best New Development Less Than 200 Beds: Campus Acquisitions, Icon Gardens Isla Vista
Best New Development, Boutique: Chance Partners, Horizon
Best Renovation of Existing Project: Cardinal Group Management, Mint Urban Red River
Best Use of Green/Sustainable Development: Humphreys & Partners Architects, Sterling Alvarado
Most Creative Financing: NorthMarq Capital, NorthView at UCF
Best Turnaround Project: Cardinal Group Management
Best Vendor/Operator Solution: EdR (with Elauwit Networks), University Towers
Best Package/Offering of Amenities: Landmark Properties, Retreat at State College
Best Marketing & Lease-Up Program: Aspen Heights, Aspen Heights, Stillwater
Best Social Media Campaign: Aspen Heights, Aspen Heights Clemson
Check back with Student Housing Business for more coverage in upcoming issues. Thank you to our sponsors, exhibitors and others who made the conference such a success. We look forward to seeing you next year!