AUSTIN, TEXAS — As we approach the start of a new academic year, the outlook for the student housing industry continues to improve, according to industry experts. All signs point to a new exit from the COVID-19 pandemic – testimony of which was seen at the 14th annual InterFace Student Housing conference in Austin, where more than 1,300 attendees gathered at the downtown JW Marriott last week -city.
The sector’s resilience during the pandemic was once again a major topic at this year’s conference, particularly during the “Power Panel”, which brought together a consortium of high-level executives to discuss industry trends. industry and outlook for the upcoming academic year.
“As evidenced by a packed house in this room once again, the sector is demonstrating continued strength, resilience and sustainability as a niche real estate asset class,” the moderator began. Peter Katz, executive director of Institutional Property Advisors (IPA), a division of Marcus. & Millichap.
“While 2021 has been a banner year for many asset classes, one constant we can expect in life is change,” he continued. “Over the past 90 days, we have seen a huge turn of events on the global economic platform. The impact of the COVID-19 pandemic has started to fade in many ways, inflation has returned to multi-decade highs, coupled with short-term increases in interest rates. We’ve seen so much volatility in the equity markets, especially over the past few weeks, and yet the investment community and institutional capital looking to deploy equity has not abated.
And while further changes are likely in the near term, Katz noted that there is still a fundamental focus and investment desire in commercial real estate – and in particular student housing – globally.
“Coming out of the pandemic, the last 18 months in our industry have been a whirlwind of exciting operational performance,” he said. “These fundamentals have led to the exuberance of institutional players looking to deploy capital into the space with another record year of nearly $10.8 billion in deals primarily fueled by large single asset sales; large portfolio sales; and several recapitalizations.
IPA forecasts similar performance to that seen in 2021 this year, with the main challenge being navigating the crossroads of rising interest rates with simultaneously outsized year-over-year rent growth in the sector.
Will investment activity continue to grow?
Looking back on the COVID-19 pandemic, Bill Bayless, CEO of American Campus Communities, noted that the Black Swan event ultimately proved student housing’s investment thesis, cash flow stability and resilience. Of the industry.
“With continued growth in rental rates every year for the past 17 years and an average occupancy rate of at least 97%, people are realizing that the cash flow stability this industry provides – from especially as we approach times of economic uncertainty again – is more attractive than it has ever been,” Bayless said. “This industry has finally proven to global institutional markets that this is one of the best investments you can make in commercial real estate.”
American Campus Communities made headlines last month after it announced that the company – the largest publicly traded owner, manager and developer of student housing in the United States – would be acquired and taken private by Blackstone Inc. main conversation throughout the conference was what this consolidation will mean for the industry as a whole.
Avi Lewittes, chief investment officer at The Scion Group, agreed with Bayless that industry consistency in rental speed and stable cash flow lends to continued investment in the space, noting that another major driver is enrollment growth at major universities.
“Everyone in this room is experiencing unprecedented speed and rental for next year, a higher than ever growth rate and enrollment growth that hasn’t been seen in years,” he said. he declares. “Across 55 of Scion’s same-store markets, we’re seeing average enrollment growth of approximately 1.7% at leading four-year universities. Among the top 20, we’re seeing enrollment growth rates ranging from 2-8%. In these fastest-growing listings markets, we are also seeing record rental velocity and greater absorption from contracts signed year-to-date.
Comparing the investment thesis against other classes of commercial real estate, Lewittes noted that student accommodation is considerably more sustainable than what is otherwise available in other sectors.
“Most analysts predict that the outsized rent growth enjoyed by the conventional multi-family sector should subside in 18 to 24 months, while the factors we highlight here for students should be long-lasting,” he said. .
This sustainability is what will keep the investment market moving this year and into the foreseeable future, according to Nick Porter, founder of Global Student Accommodation.
“If you’re looking for those maximum returns at the top of the market, look back to 2007 and 2008,” he said, referring to the build-up to the global financial crisis. “That’s not what we do. Student accommodation will always be consistent, but what we won’t have are the dips when things go downhill, and that’s what people are investing in. I’m thrilled that permanent, long-term capital is finding a home with us, and that’s what guides us through economic cycles when you take a 10-15 year view.
Funding is available
With such pent-up demand for investment activities comes the question of funding and its availability in the current landscape.
“We still have a very liquid market and our business is currently as institutional as it gets,” said Tim Bradley, director, founder and CEO of TSB Capital Advisors.
“There is a lot of paper in the market, and while the CMBS market has exploded in the last 60 days, where has it gone? banks,” he continued. “About 90% of our financing of last year was bank financing. With fixed rates rising between 4.75% and 5%, we haven’t seen the shift to core assets take a hit. There’s so much capital trying to get into the space right now.
But debt markets are always liquid, according to Bradley, the process just takes a lot longer.
“We need to add two more weeks to what we would have initially seen when we submit funding opportunities and requests to lenders, whether life insurance companies, banks or loan funds” , Bradley said. “We think we will continue to see a lot of liquidity on the debt side, and with the long-term curves going where they are, the conversation is focusing on how to hedge trades.”
As for construction funding, Bradley noted that it’s available, but what you can get comes down to sponsorship and experience. “Delivery is the most critical element of student housing, and it has taken people out of our business to the point where we think people have learned,” he said.
IPA’s Katz noted that the places where he expects to see the biggest negative leverage cash flow deals will be very affluent markets that offer the opportunity to pay outsized rent growth. “These markets are also in high demand, so any product that is released there will be in high demand from the investment community,” he said.
Tenancy and Rent Prospects
Pre-renting for the next academic year has returned to normal levels after brief uncertainty at the height of the COVID-19 pandemic, and rental growth is expected to enter the new rental season.
“We are having a banner year,” said Wes Rogers, President and CEO of Landmark Properties. “We have just under 60,000 beds in our portfolio and are currently at around 7.2% rental growth. We hope this will increase by the time students start moving in.
“On Monday, we were 86.6% pre-let for the upcoming academic year, with our ‘uber-core’ projects outperforming at approximately 91% pre-let and 8.6% rental growth,” Rogers continued. . “We also focus a lot on our construction business. We have a record number of projects under construction, with $3.2 billion under construction today on approximately 17 projects. We hope to start a record number of 21 projects this year. Capital flows [as capital providers see] operational performance and record year for the industry.
Marc Lifshin, founder and CEO of Core Spaces, sees similar results. “We are currently about 98% occupied and 95% pre-let for the 2022-2023 academic year,” he said.
“We are about 15% ahead of last year in our comparable store portfolio, with rent growth of about 4%,” Lifshin continued. “It sounds good to be at 95%, but being at 95% 90 days from moving in means there’s still money on the table.
“When we look at next year we are looking to increase rents by 8% to 10% where we think we can recover some of the money that has been left in the following year and move forward. . It is a question of defining the right strategy between renewals and new leases and determining the average of an achievable rent growth. »