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National Multi Housing Council | NMHC Update
National Multi Housing Council | NMHC Update
October 9, 2013
Student Housing Firms Prepare for Growth
Capital Biases Still Exist for Student Housing
Sector Fundamentals Remain Strong, Focus Shifts to Operations
Supply Increases But Vast Majority of Campuses Remain Attractive
Student Housing Firms Prepare for Growth

The 11th annual NMHC Student Housing Conference & Exposition, held last week in New Orleans, attracted a record number of student housing providers, financiers, suppliers and service providers for three days of programming, exclusive research, product exhibits and high-quality networking. Held right after the beginning of the new school year, the conference offers attendees a pulse check on the lease-up season and an opportunity for attendees to share their experiences with peers.

Lowell Catlett, New Mexico
State University

Keynote speaker Lowell Catlett, regent’s professor, dean and chief administrative officer at New Mexico State University by day and futurist by night, entertained attendees with his academic view on the nation’s economic underpinnings and outlook.

While he was wont to make any predictions, given economists’ poor forecasting accuracy—“you can flip a coin and still beat us by three percentage points,” he said—he highlighted the role today’s student housing providers have in shaping the future, even beyond housing. “The seeds of the next game-changing idea or technology are planted in this generation of students that the student housing industry serves; student housing providers should be trying to figure out how to ensure their communities can be better incubators of the next big thing by bringing together people and ideas in new, creative ways,” he said.

“We don’t know the future, but the ones that think about it are going to be the ones who are going to adapt most easily,” he said.

Andrew Hogshead, The Collier Companies

 The Collier Companies CEO Andrew Hogshead hit a similar note in his keynote speech on the young adult market, pointing out that student housing matters disproportionately by virtue of the fact that it serves the Millennial generation, an economic force, far into the future.

“Student housing is a first chance to form brand loyalty by becoming part of their community and their herd,” he said. “We are a laboratory for predicting and analyzing Millennial behavior.”

With the future of student housing clearly shining brightly, conference attendees also got down to brass tacks on a number of strategic and operational issues that affect how well positioned their companies will be in that future, from attracting capital to maintaining rent growth.

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Capital Biases Still Exist for Student Housing

There’s no doubt that student housing has come a long way since its humble beginnings, successfully shedding its Animal House image and earning a reputation on Wall Street as a veritable asset class. The housing downturn further fortified that view, as student housing led the multifamily industry into a strong recovery. Moreover, capital providers that hunkered down during the downturn have a lot of dry powder to get out in the market and continue to see student housing as an attractive investment.

“The balance sheets of the banks have certainly recovered, and they have a lot of capital to put out,” said Peter Donovan, senior managing director at CBRE, during a members-only, pre-conference finance roundtable discussion. “In order for banks to maintain earnings and maintain net interest margins, they are having to lend more on real estate than they have historically.”

But the banks are not alone. As the multifamily industry as a whole has begun a solid recovery, the commercial mortgage backed securities (CMBS) market and life companies also have increased their multifamily lending, with a good amount moving into the student housing space. During a panel discussion with top student housing lenders, Mitchell Kiffe, senior managing director at CBRE Capital Markets, said, “Last couple of years, our origination volume has been agency loans, but, this year, it’s been flip flopped. This year, we’ve done more student housing deals with life companies than any other source.”

Top multifamily lenders from CBRE Capital, KeyBank,
Freddie Mac and Fannie Mae discuss capital flows to student housing.

“We see life companies typically being lower leverage, very picky on location, sponsors and universities,” Kiffe added. “But if you get a deal they really like ... they can be very competitive.”

Todd Goulet, senior vice president and regional production manager for KeyBank Real Estate Capital, further summed up the idiosyncrasies of some of the capital players in the student housing market by saying, “If the life companies want a low leverage deal, they can win on pricing. CMBS—the conduits can win on leverage and terms. The GSEs [government-sponsored enterprises] will be competitive on full leverage deals.”

Despite this improved ability to attract new and varied capital sources, student housing experts still maintain that unfair bias is baked in compared with traditional multifamily financing. On a typical deal, student housing experts assert that they generally have to bring more equity to the table for lower leverage, although they contend that how much more varies depending on the asset, location, sponsor and anchor school.

Some lenders also place a premium of anywhere between 30 and 50 basis points on construction loans for student housing. And some major sources of capital for multifamily still remain closed for student housing. “FHA [Federal Housing Administration] still doesn’t do purpose-built student housing,” said Tom Booher, executive vice president of PNC Real Estate, during the pre-conference discussion. “They will finance regular multifamily that has a student contingent, but they haven’t wrapped their arms around purpose-built.”

Vince Toye, managing director and GSE head of production for Wells Fargo Multifamily Capital, added, “Both Fannie and Freddie have specialty products—student, senior, manufactured housing. … But a lot of capital sources don’t have the expertise and don’t want to get into those specialty markets.”

However, the GSEs will likely have to back off some of their investments in the sector as their regulator pushes to reduce overall lending. During the lender panel, Rich Martinez, vice president of production and sales at Freddie Mac, said, “We were lucky enough to catch the beginning of it [student housing wave] and ride it up. … [but] we will do 10 percent less this year [than in 2012].”

As capital providers fastidiously select their investments in the sector based on particular parameters, pricing and valuations also are affected. Student housing experts say that a student housing transaction typically has a higher cap rate than comparable multifamily trades by roughly 100 basis points.

Add in rising concerns about oversupply in the student housing market and those discounts are also spilling over into stock valuations for publicly held student housing REITs. American Campus Communities (ACC) President and CEO Bill Bayless was particularly vocal about this issue during the conference kick-off panel. “ACC, this year, is really an example of whether you want to be in student housing,” he said. “We are on pace to deliver nine to 12 percent shareholder returns. But this is the first time we didn’t meet [Wall] Street expectations. And the results were punitive.”

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Sector Fundamentals Remain Strong, Focus Shifts to Operations

While the long-term fundamentals for the sector remain strong and overbuilding appears to be confined to a few select markets, many student housing executives were shifting strategies as the sector’s performance moves from aggressive expansion to more steady growth. Many felt that most of the big rent rate growth was behind them, so they were focused on fine-tuning leasing and operations to be able to still log rent growth.

However, during some peer-to-peer roundtable discussions on rent growth, a number of executives said they were struggling to effectively use revenue management systems to help guide them in setting rent raises. In any given student housing market, it is very challenging to obtain up-to-date rental comparisons with similar properties and traditional apartment comps fail to be a good proxy. As the lease-up period proceeds, executives feel less than confident about the rent levels they are setting, primarily because they don’t get a chance to readjust until the following year’s lease up.

“The repercussions of getting it wrong are much more long lasting than, say, in the airline or hotel industry,” said one participant.

Other industry executives said it was becoming increasingly difficult to balance rent growth with renewals. Most said they targeted a solid renewal base of 30 to 40 percent but, in some cases, they pushed rent growth a little too hard and found that the base eroded.

The need to maintain good renewal rates was pushing some firms to try to figure out how to add value to keep their residents happy and in place longer. From events like Taco Tuesdays to resident happy hours, some executives said they were allocating more money to community events and resident perks.

However, a number of industry executives said it was becoming more difficult to find qualified on-site leasing help. This lack of reliable, quality workers was also spanning into maintenance and service providers like painters and plumbers. Julie Bonin, COO of Asset Campus Housing, said, “Finding talent is another horror story. It’s getting extremely challenging to find the resources to staff a property.”

Moreover, beyond the dearth of qualified talent, a number of top student housing executives also pointed out that today’s labor pool is very different than previous generations, which requires firms to manage, incentivize and compensate people in new ways.

With the industry moving into a more mature portion of its natural cycle, the next year will be critical for many student housing firms. For a pulse check on the changes and strategies student housing firms put in place to maximize their position in the market, be sure to join the NMHC student housing community for the 2014 NMHC Student Housing Conference & Exposition, Sept. 30-Oct. 2, 2014, at the Palmer House Hilton in Chicago.

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Supply Increases But Vast Majority of Campuses Remain Attractive

The steep increase in beds in the pipeline—the market currently has as many as 50,000—has resulted in a lot of speculation about oversupply and impending distress in the student housing market from the media to Wall Street investors. While much of the ramp-up reflects the industry recovering following a slow period of production, concerns are building in select markets.

“It [oversupply] is preventable, but it does exist,” acknowledged Campus Apartments President and CEO David J. Adelman during the conference kickoff panel.

During an investment outlook panel, Peter Stelian, managing principal with Blue Vista Capital Management, said, “We’re definitely concerned about Fayetteville, Arkansas. We’ve definitely seen the complete absence of underwriting discipline on both the debt and equity side. San Antonio and College Station [in Texas] also—there’s just a lot of new supply coming in, and it’s really challenging.”

Bob Clark, Peak Campus Management, LLC

Bob Clark, president of Peak Campus Management, LLC, added, “From our vantage point, Charlotte is going to struggle. University of Arkansas in Fayetteville, and, I think, Minneapolis is taking on a whole bunch of new supply again this year. On our watch list is Oxford, Mississippi. And then University of Southern California, where there is a big project that added a little under 2,000 beds in 2012-2013 and will do the same for the year ahead.”

Other student housing executives pointed to the areas around Clemson University, Florida State University, Georgia Southern University and the University of North Carolina at Greensboro as having potential oversupply issues.

EdR CEO Randy Churchey
shares a laugh with American Campus Communities CEO Bill Bayless during the conference
kick off.

However, for ACC’s Bill Bayless, the headlines are masking an underlying shift. “What’s happening today is modernization of product,” he said during a CEO panel with Campus Apartments’ David J. Adelman, EdR’s Randy Churchey, Campus Crest Communities’ Ted Rollins and The Collier Companies’ Nathan S. Collier. “The product that is being pushed out of the marketplace is the product that should be pushed out. Where we tend to see oversupply is … where you have too many people going for that upper echelon of pricing. You tend to see oversupply at high price points, but, over time, that’s to replace older product that should be taken out of the equation.”

Collier, principal and chairman of The Collier Companies, said, “It’s a lot easier to overbuild in a smaller market than a first-tier university.”

Despite pockets of potential oversupply, most executives felt confident that underlying demand could support the higher level of production. During another panel discussion, one executive pointed to the fact that most college campuses typically house just 30 percent of their students, leaving the remaining 70 percent looking for quality housing. Furthermore, some executives expressed more concern over the rising number of developments experiencing opening delays, leaving companies scrambling to meet their commitments to house students.

Donna Preiss, founder and CEO of The Preiss Company, said, “There’s a lot of conversation on all the new development and whether it’s overbuilt. [But] 25 to 30 percent of the new deliveries didn’t deliver on time. And that’s a big uh-oh. It all comes down to execution.”

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