CAPRE Exclusive | Student Housing Developers Discuss Demand-Supply Dynamics Around US and Unique Opportunities for New Entrants
DENVER, CO — CAPRE’s inaugural Mountain West Student Housing Forum debuted late last week, and kicked off with a wide-reaching introductory panel, Mountain West Student Housing 360: Development, Investment & Leasing Activity in 2019. Featuring a quartet of leading experts representing both regional and national perspectives, the panel kicked off with David M. Pierce, Principal at Parallel Company sharing an overview of the national landscape from the Parallel perspective.
“I think the overall picture is still very good. There’s some volatility. There are some markets that we simply won’t go to anymore, because they are overbuilt, and it will take years to recover. There are some markets we’ll go into and we’ll compete to cannibalize product that’s 15 years old, because that’s all that’s there….and it could create some problem for those properties,” he shared. “There is another opportunity out there — and we’ve all talked about it – there are smaller markets that have remained relatively quiet, and there aren’t many of them, but there are small markets where you can go in and build differentiated product, modern & amenitized, but then people will notice you’re there and they’ll come too and the competition will start. There are opportunities out there. It’s not like it was ten years ago, but you can build something and fill out. We’re optimistic…we’re bullish on the next few years.”
Next, Lee Ryder, President of University Communities LLC offered a similar take on the broader industry dynamics at play. “It’s been a good year for us. From a deal standpoint…student housing went through this period of all this institutional money just flowing in. Call it the credit crunch…but institutions were saying that Whoa, I should have this in my portfolio. All the rest of my stuff tanked, and student housing is still able to raise rent,” he mused.
“So there was this flood of capital coming in…fast forward to now, the space has matured. Many of those institutional lenders have money in the space, at all different levels. So we’re going through a phase of stepping back, and saying, if I go into this market and build, it’s not as guaranteed as it was a years ago. There’s a lot more supply,” he shared. “To me, supply in these markets is the biggest risk. Look at College Station. It’s decimated. They’re selling those bonds now for 40 cents on the dollar. But for us, you need to pick your spots in the correct spots, with strong schools…we think there are still some opportunities.”
However, the conversation soon transitioned into a multi-layered discussion about the strengths and weakness of various types of student housing markets across the country. For example, Eric Frank, Chief Investment Officer at Cardinal Group Companies offered some essential knowledge of how to look at the difference between public and private schools. “If you look at the bigger flagship schools in the Mountain West, they tend to be growing. A lot of the smaller schools are actually shrinking. If you look at demographic in student housing in general, we’re basically flat or declining a bit,” he began, before sharing that within that dichotomy, there are very clear winners and losers.
“The expensive private schools have rally flatlined or gone negative from a growth standpoint. The less attractive state schools have really dropped dramatically. In certain states where there are budget issues or demographic issues, you’re seeing huge declines. Illinois has that, New Mexico has that,” he explained. “And so I think that’s actually the problem that makes it a challenge. If you have declining enrollment, it’s the equivalent of having oversupply year after year, and there’s no way to fix it.”
Jared Everett, Managing Director at Greystar also offered some advice on this topic. “There are market specific trends and national trends. In Colorado, there is opportunity in Tier I and Tier II markets. But one thing that makes the market difficult is the density of opportunities,” he asserted. “90% of my work is in California – the density and the size of the institutions…I don’t see a flood of future projects in Colorado.”
A little later on, Frank continued on this same thread, giving his take on the Colorado market. “I like being located here, from a company standpoint. It’s a great place to attract employees and it’s easy to get anywhere. From a market standpoint, there’s a big distinction between on-campus and off-campus,” he cautioned. “The math is totally different. You could have a school with declining enrollment…but if they’re backing up that lease, then build it. Your math is a little bit different on the off-campus side.”
He then instructed the gathering to look at a nearby market, Auraria for a timely illustration. “There are basically 2 or 3 deals for purpose-built student housing in this market, and while it’s a huge school, it’s challenging to figure out,” he outlined. “There’s a huge commuter base, so you don’t really know how much demand there is for purpose-built student housing until you’ve surpassed it. That’s a challenge in these urban campuses versus being in a college town, where the students have to live near campus. There isn’t anywhere else to live. In these downtown campuses, your students can live anywhere. The best play probably is to do on-campus….demographically, Colorado is very strong, so is Utah. But some places like New Mexico are not.”
Two thirds of the way through the panel, moderator Brian Klebash, Founder and CEO of CAPRE, asked a question that stemmed from CAPRE’s situational knowledge of the booming — and consolidating — data center sector. “Is there still room for new investors to get into the student housing industry?” he asked.
Ryder responded that student housing is incredibly fragmented. “There’s not any player out there that owns even 5% of the housing stock. So from that standpoint, there are attempts for consolidation…but I think that there is still opportunity for smaller deals and one-off deals to be competitive in markets. it’s a local business. which is different from a lot of other real estate asset classes,” he shared.
Pierce then concurred with Ryder. “My company’s betting on that it’s still fragmented, because we hit the reset button and started from scratch a few years ago. But I do think the future is in consolidation. there’s consolidation happening. I don’t know how long it’s going to take…but the fragmentation will become less fragmented,” he predicted.
To conclude the panel, a couple of panelists offered insight into how they choose markets to enter — though the takeaway was that these decisions are very nuanced, and difficult to summarize in a couple of sentences. For example, Ryder cautioned that even if universities are looking for or in need of more housing, the numbers on the ground can change quickly.”When looking at a market to go in to build or buy, looking at private versus public…if DU, as an example, becomes a competitor, DU’s not going to lose,” he explained. “They’re going to make sure their beds are filled. It becomes a difficult investment decision. If there’s a finite number of students, and they’re having trouble filling their beds, they’re going to figure it out.”
Cardinal’s Frank then offered some succinct analysis of his firm’s wishlist. “In a nutshell, we want schools that are big, tough to get into, but cheap to go to. at a huge school, you can build a thousand beds and if there’s 60,000 beds, you can figure it out what to do even if the market doesn’t need those beds. It’s not devastating. Schools that are tough to get into and highly desirable can always get enrollment if they want it. And cheap to go to, to me, means resilience in a downturn,” he divulged. “If you look at these mega schools that are big and tough to get into, like USC, that’s also expensive. A lot of these kids are coming from out of state. If you’re coming from Colorado, and there’s an economic downturn, your parents might say yeah, USC is a great school, but so is Boulder. And I can send you to Boulder for one tenth of the price.”