Last year, the two dominant names in student housing, REITs American Campus Communities (ACC) and Memphis-based EdR, saw their stock prices fall. And on the surface, that appeared to be bad news for sellers of student housing.
In the three-year span of 2010 to 2012, the two REITs accounted for 16, 8, and 30 percent of all institutional-grade student property acquisitions, according to New York-based research firm Real Capital Analytics (RCA). In the last five quarters (through the first quarter of 2014), they’ve only bought seven deals between them.
“As our stock took a hit in 2013, our cost of capital increased,” says William Talbot, chief investment officer for Austin, Texas-based ACC. “It doesn’t make a lot sense to do core acquisitions, given where your implied cap rate is on stock.”
For the immediate future, at least, ACC will only make acquisitions if they’re matched with dispositions (and the company will be primarily focused on development). It continues to monitor the market and underwrite potential purchases.
“We’re not completely out of acquisitions game,” Talbot says. “We’re just being more selective.”
Cap Rate Concerns
With lingering questions about the viability of student housing given the slight decline in occupancies and overdevelopment fears in some markets, the slowdown of ACC and EdR's respective acquisition activity has stoked fears that the sector's cap rates would rise.
“People expected rates to start moving, with the REITs out and interest rates moving up, but we haven’t seen it happen yet,” says Ryan Lang associate director of student housing for Los Angeles-based CBRE’s National Student Housing Group. “With the transactions we’re working on and deals that have closed, we’re seeing zero difference in cap rates [from before ACC and EDR backed off].”
Lang says institutional capital (either returning to the market or coming in for the first time), fund capital, and private capital looking for value-add deals within walking distance to universities, have helped fill the gap.
“There are, at least, a handful of new groups that have come in on the buy side in the past three to six months and will start getting active this year, which is very good for the space,” he says.
In its first quarter commercial sales report, RCA said student housing volume was down 27 percent versus the first quarter of 2013, but pricing only slid 11 percent. Ben Thypin, director of market analysis for RCA, didn’t think lack of available buyers was a real issue. It's a supply, not a demand problem, he says.
“There’s really not that much good student inventory out there,” he says.
There have been a few portfolios to hit the market recently, though. Lang found a buyer for three properties sold by ASB Capital. He wouldn’t reveal the sales price, but was happy with the result. A bigger litmus test for the market may be his 16-property portfolio from Chicago-based Harrison Street Real Estate Capital.
“Overall the interest level was still good,” Lang says. “We got a number of groups looking at it from a portfolio basis. But I think, at the end of the day, breaking it up is probably going to yield the highest return.”
The Harrison Street assets vary in age and distance to campus, which Lang says plays a bigger role in the decision to break it up than the absence of the REITs as potential buyers.
“If a well-diversified portfolio like Harrison Street, where there’s some new product and there’s some older product, doesn’t fit a particular buyer’s portfolio, it sometimes harder to get them to reach out on that,” he says.