If you were a student housing developer 20 years ago, you were something of a nerd.
Real estate industry conferences and networking events resembled the social hierarchy of a high school cafeteria: Retail, office, and multifamily were the popular kids, confident and loud in their cliques, and student housing developers were the ugly ducklings, on the outside looking in.
“I spent a lot of time in the late ’90s and early 2000s telling people I was a student housing developer. They said, ‘It’s aggravating turnover. Why do you do it? It’s such a niche,’?” says David Adelman, president and CEO at Philadelphia-based Campus Apartments.
But these days, nobody questions why Adelman would do it; they’re more likely to ask how it’s done. The sector, with its access to easy liquidity and incredible demographics, is garnering the respect and curiosity of investors and developers all over the country.
In some ways, the Great Recession is to blame. The sector proved to be so resilient through the downturn that many commercial real estate developers, particularly in the retail market, entered the space as their own construction pipelines slowed to a trickle.
And 55-year-old Campus Apartments—along with industry veterans like Education Realty Trust (EdR) and American Campus Communities (ACC)—is serving as a professor to these freshmen. The recent partnerships struck by these veterans offer a blueprint for new entrants to take note.
Because now, class is in session.
The Wild, Wild West
Campus Apartments began life as a rehabber, taking old buildings and converting them into student housing around the University of Pennsylvania, which, back in 1958, was serviced by only 100 Campus Apartments beds. Fast-forward to today, and the company has a portfolio of 34,500 beds across 25 states and operates 1,500 apartments for the university that served as its springboard all those years ago.
It’s been a long journey from the perception of student housing as Animal House.
“Student housing used to be kind of the Wild, Wild West,” Adelman says. “Landlords looked at students as a necessary evil.”
In the early days of the industry, no one really wanted students living in their off-campus units, but for many local landlords, it was a tactical financial move. There also was little structure to the student housing industry, but that started to change in the late 1990s.
Campus Apartments’ first significant partnership with the University of Pennsylvania, in 2001, led to the management of a dilapidated building on the outskirts of campus, one the university had no clue what to do with.
The partnership proved to be a big win-win, providing another revenue stream to Campus Apartments while solving the university’s problem. To many universities, being in the housing business was part of the nature of the beast, but by the late ’90s, they discovered the value of outsourcing noneducational services.
“Back in the day, when you went to college, the person serving your food in the dining hall was a university employee,” Adelman says. “What people [later] realized was they could outsource the food service to Aramark or Sodexo. So my thesis in ’97 was: Why can’t I be the Aramark of university real estate?”
How Much is Too Much?
Student housing’s strong fundamentals have inspired a wave of new supply that continues the modernization, and growing sophistication, of both on- and off-campus housing. And it underscores just how far the sector has come.
“The most important tease of any real estate business is what is going to be the demand for your product,” says Randy Churchey, president and CEO of Memphis, Tenn.–based EdR Collegiate Housing. “And, fortunately, for student housing, the demand side of the equation has been fairly stable for the last couple of years. When you have that nice, stable, increasing demand, it makes for a very good investment.”
Over the next few years, university enrollment is expected to increase about 1 percent per year. And forecasts show that new supply will be around 50,000 beds in 2014, although the demand is about 65,000, setting up a stable playing field.
“[It also] brings into fruition much of the pipeline that was planned prior to and during the economic downturn in 2008–2010, when we saw a slowing of new supply,” says Bill Bayless, president and CEO of Austin, Texas–based ACC.
But what happens after that, when the starts commenced in the past three years come to fruition? Many industry stakeholders are concerned that student housing’s newfound sterling reputation will work against its fundamentals.
“Student housing today is one of the darlings of the multifamily industry,” says Brent Little, president of Dallas-based student housing developer Fountain Residential Partners. The company just broke ground on three new developments, adding 1,400 beds to serve the University of Texas–San Antonio, the University of Houston’s main campus, and the University of Minnesota–Twin Cities.
“Right now, there is a significant amount of capital and equity flowing into the sector,” Little says. “I think, today, our greatest risk is overbuilding.”
The poster child for this situation right now, he says, is the Texas A&M market. There have been thousands of beds delivered in the past several years, with 85 percent occupancy and another 7,000 beds under construction.
While it varies from market to market, in general, the new supply pipeline is weighted more heavily toward the luxury Class A end.
“Some specific markets may have short-term absorption and stabilization issues for new supply,” Bayless says, “especially in markets where too many developers are targeting the upper socioeconomic students within the overall student body.”
Georgia Southern, the University of Arkansas, and universities in both Tallahassee, Fla., and Texas are already overheating, industry watchers say (see “Class Picture,” page 25). And although these markets all boast large schools, those universities aren’t growing quickly enough to absorb all the product coming around the bend.
But there are strategies to protect your company from the overbuilding trend. ACC, for example, focuses on large public universities with enrollments in excess of 17,500, schools that feature what ACC calls a “residential campus heritage.” By focusing on infill pedestrian markets with high barriers to entry—and getting as close as possible to campus—the company is able to insulate itself even if a market becomes overbuilt on the outskirts.
“When overbuilding does occur, we want it to take place outside of us,” Bayless says.
Those barriers to entry include density limitations, entitlements, and an ability to acquire funding. Today’s high cost of land also presents a potential obstacle, especially in urban areas. But to many established student housing companies, those barriers are a double-edged sword—they may make it difficult to develop, but they also keep supply and demand in check.
Another strategy is to hedge your demographic bets. Developing in a market that also has a high volume of young professionals helps when all else fails, giving you the ability to reposition the asset as conventional rentals.
As always, location is everything. Most of the student housing projects breaking ground today are closer to university campuses.
“That’s a big difference [from] what happened in ’06, ’07,” Churchey says. “There was a lot of new supply added, but it was farther away from campus. Those were the projects that haven’t done well since the recession.”
Yet, you can only get so close—and building an on-campus residence is an entirely different ball game.
An Exclusive Club
Two years ago, the University of Kentucky’s decision to outsource its entire campus housing portfolio to EdR was a watershed moment for the industry, marking the first such privatization. And when Campus Apartments recently partnered with Washington, D.C.–based Howard University to produce on-campus residences, it was just the latest in this trend of public–private partnerships.
But those partnerships are in a pretty exclusive club.
“I don’t think you’ll see as many people getting into the on-campus arena,” Adelman says. “Universities don’t want to take that chance. It’s going to be hard to get people into that space.”
Most universities have difficulty attracting funds for new buildings and infrastructure, let alone creating new dormitories for incoming students. That sets up a prime opportunity for the upper echelon of student housing developers.
“They figured out that maybe a way to go is to let the private sector do what it does best: build and own [housing],” Churchey says. “And let the university do what it does best—educate.”
EdR’s $101.2 million plan to add more than 4,500 beds at the University of Kentucky is well under way and is set to be delivered by 2015.
These partnerships are long-term engagements, and as such, universities look for developers with lengthy résumés. And the financial transparency and stability required of public companies is also a valued trait.
“We’re expected to be a student housing real estate trust forever,” Churchey says, which works in EdR’s favor. “That financial transparency and flexibility give the university a great piece of comfort. You can build and own, no matter what the financial cycle.”
The vast majority of student housing developers won’t be able to fully grasp the intensive operational efforts—and unique partnerships—that go into running an on-campus community, Churchey says, and universities are well aware of that.
“For colleges and universities, student housing isn’t just real estate, it’s part of the core academic mission,” Bayless adds. “That business segment has very high barriers to entry that most new entrants won’t be able to penetrate.”
The Way to Build
One thing that both on- and off-campus facilities have in common is a focus on amenities.
In the past, student housing was the tail of the dog, always chasing the technological and operational advances of its conventional multifamily brethren. But now, as more multifamily developers focus on the housing wants and needs of Gen Y, student housing serves as the vanguard, a proving ground of sorts.
“Student housing was chasing luxury conventional housing; they were following what they see on the conventional side,” says Little. “Now, the trend has almost reversed.”
With students being the first adopters, almost the beta testers of new designs, the market has solidified its reputation as a trendsetter. Adelman recognized this dynamic back in ’97 when he added an Internet package to the Campus Apartments umbrella, offering full-speed Internet for student properties.
“Bandwidth Internet is the most important thing you can provide on the property,” he says. “The property will be cursed without it.”
But it’s not just technology—fitness and sports-oriented common areas have also grown in stature, as well as square footage.
“We’re seeing that [amenities] are getting larger,” says Rohit Anand, principal at Vienna, Va.–based architecture firm KTGY. “Pool areas, hangout spaces are more spacious than we used to design. The amenities are getting quite a bit larger.”
New students are typically also very environmentally aware, giving owners a great marketing tool for any green features they can tout.
“They all want to know about recycling,” Adelman says. “They want to know that they’re being green.”
With that environmental stance comes a greater focus on bikes. And KTGY has been working on cracking the bike-storage code in its new student developments. Part of the challenge is finding space in each individual unit to store the bike itself. The firm has also struggled with finding a central location for “bike workshops” where students can maintain their wheels.
“You also need a place to park the car,” Anand adds. “It’s not so much that you use the car to get to class every day, but you need a space to park it.”
There’s also been a big push from universities to house students for the full four years of college, Anand says, where they once guaranteed only freshman and sophomore housing. With more units, architects have had to get creative to manage the density. More properties in urban areas are providing four to six beds per unit to accommodate the crowds.
But every market is different. In an urban market like Minneapolis, units are typically on the smaller side. But student housing in a market like San Antonio naturally features larger units. “If you build micro units in San Antonio, the students would be claustrophobic,” Little says.
The most popular floor plans are four-bedroom units, as developers aim to create an economy of scale through density.
For both the student and the developer, it’s all about choosing the right university.
Even with rising student debt and tuition increases, there’s little fear that the demand for student housing will be affected.
“Most families believe that a college education is a worthy investment, and the last recession kind of proved that,” Churchey says.
Other factors that developers might worry about, including the impact of online classes on student housing demand, are insignificant, he adds. Online education could even turn into a feeder to the university environment, and so far it hasn’t had any negative effect on demand.
Churchey also concludes that the rate of tuition increases will eventually slow down, while the wave of Millennials entering their freshman years will only accelerate.
“The supply dynamics are in our favor, and [the] aged housing supply on campuses will eventually be replaced,” Churchey says. “The future of student housing is very bright.”