Many multifamily developers consider student housing a subset of the apartment market. Three of the biggest student housing owners and operators think it’s a lot more complicated than that. The industry has unique challenges, and requires specially targeted strategies for success, they say.
With student housing projects, one of the biggest challenges is the sheer intensity of the business.
“It truly is an operating business, and it demands an expertise that is different than many other real estate property types,” said Bob Clark, chief financial officer of Place Properties. The Atlanta company has developed more than $470 million of student housing. Student housing managers spend more time not only with their tenants, but also fielding calls from tenants’ parents and guardians. “Operators at some level become surrogate parents to these students, because it’s the first time many of them have been away from home.”
Memphis, Tenn.-based Education Realty Trust, another big student housing player, has 36,000 beds at 59 collegiate communities in 21 states under its wing. “We do more entertaining of the tenants. We are talking about tenants who are mostly 18- to 23-year-olds. We provide a lot of social activities,” said CEO Paul Bower. “We are a part of their college experience. We do what we can to help foster educational experience and not just hand them the keys and collect the rent.”
The intensity of the annual leasing and turn cycle is a big challenge even for experienced student housing operators.
“Students just moved into our properties in August, and right now, we’re kicking off again, two months later, the annual re-leasing of all our beds. And the thing that is very difficult is that in each one of these markets, the leasing windows are short and they vary from market to market,” said Bill Bayless, president and CEO of American Campus Communities (ACC), based in Austin, Texas.
ACC owns and manages 38 communities containing about 23,700 beds. The firm also provides management and leasing services at 53 properties. The real estate investment trust is funding 100 percent of development costs for an on-campus project at Arizona State University that is expected to cost $360 million to build. Historically, developers have not invested their own equity in on-campus housing. The cost of projects generally are funded with debt. Bayless said ACC will have an 85-year ground lease, which includes two 10-year extensions.
For most student housing, the lease term is from Aug. 15 to July 31. “The annual turn is a tremendous undertaking,” said Bayless. “In our business, it all happens at once. We have 10 to 14 days to make ready all those units for the next move-in. The need to orchestrate that is something that we have spent more than a decade working on.”
He added that in many cases, operators underestimate operational expenses, and it has made lenders more prudent in their underwriting.
Bower adds that the majority of conventional apartment owners and developers he’s seen who have tried student housing back away from it after some experience.
One key to the success of many student housing pioneers is establishing a specialized operating platform. That’s exactly what ACC did when it created its Leasing Administration and Marketing System (LAMS), a Web-based software program that delivers many benefits that standard multifamily housing programs can’t achieve, said Bayless.
LAMS provides a host of features, including prospect tracking and follow-up, real-time monitoring of lease terms and closings, leasing reports, leases and future-period rent rolls, and measurement of marketing medium effectiveness.
The big players do their research before anything else. Student housing operators talk to university officials about the school’s master plan, enrollment trends, and demographics. Even when developers are planning off-campus student housing, communication with the university is critical to success. “The school listing your properties on its Web site gives you exposure,” said Clark of Place Properties, which develops only off-campus assets.
Bayless said the goal is to use the market research to develop a product that is different from others. “We do ZIP code analysis to identify where students are coming from. What’s the ratio of graduate to undergraduate, full-time versus part-time? How many males and females?”
For example, when ACC learned that 60 percent of the student body at Texas A&M were females, it designed housing with one point of entry and large walk-in closets across the street from campus, said Bayless.
Another fundamental element of the business is staying on top of maintenance.
“One of the unique things about the business is—if it is done right—it has almost an endless lifetime [of profitability] versus conventional apartments,” said Bower. “Apartments have issues like highway, employment, and neighborhood changes that affect their values over time.”
Education Realty Trust opened its first property, Granville Towers, in Chapel Hill, N.C., in 1964. The company has renovated it top to bottom at least three times and regularly replaces facilities. “It’s doing the same thing it did 42 years ago. The university has grown over that period of time. It’s a better location today, and it will be a better location 50 years from now,” said Bower.
What do the most successful student housing operators see on the horizon for student housing?
“It’s definitely going to attract a lot of capital,” said Clark. “We still see it as a growth market.”
“I think you’re going to see some pretty high-profile failures,” said Bayless. He said a lot of developers getting into the business may consider student housing properties simply apartments that house kids. That approach leads to failure, according to Bayless. “You are creating an environment conducive to academic achievement. If the product doesn’t reflect that, it isn’t going to work,” he said.
Bower said that since 4,000 four-year colleges exist and his firm houses students at 42 campuses, he isn’t too concerned about a “shrinking universe,” even as student housing becomes increasingly competitive.