Investors are in two camps when it comes to the student housing market; one group feels that fundamentals are strong and that there is still room to grow, while the other sees too much risk in the current market due to lower demand and overbuilding. Declining stock prices in student housing real estate investment trusts seems to justify the worry, as does agreement regarding overbuilding in large university markets like Los Angeles, San Antonio, Charlotte and Minneapolis. As competition among units increases, it’s possible investors may decide student housing is no longer worth the risk. For more on this continue reading the following article from National Real Estate Investor.
Despite declining stock prices for student housing REITs, the fundamentals of the student housing business are still strong, according to Jim Arbury, Vice President for Student Housing with the National Multi-Housing Council.
“For people who know what they are doing, the future continues to be very bright,” says Arbury. “There is still a lot of growth opportunity, even in schools that look like they are slightly overbuilt.”
Stock prices of leading student housing companies have fallen steeply since early 2013 – battered by investor fears of overbuilding, weakening college enrollment, and the difficulty of getting student loans, among other trends that could damage the business. American Campus Communities’ (ACC’s) stock fell from close to $48 in mid-January to less than $34 in October—losing more than a quarter of its value. Campus Crest Communities and Education Realty Trust also suffered steep falls. Over the same period, the Dow Jones rose more than 2,000.
“This is the first time we didn’t meet [Wall] Street expectations. And the results were punitive,” said Bill Bayless, ACC’s President and CEO, at the NMHC Student Housing Conference, held this month in New Orleans. “[But] we are on pace to deliver nine to 12 percent shareholder returns.”
Student housing experts like Arbury and Bayless point to what they see as the fundamental strengths of the business. “The downward spiral year-to-date in the student housing stocks is overdone,” according to a Sept. 9 report from stock analysts Baird Equity Research.
Investors fear overbuilding, weak demand
Overbuilding in a few markets has worried investors. Student housing developers now have as many as 50,000 beds in their development pipeline. “There’s just a lot of new supply coming in… We’ve definitely seen the complete absence of underwriting discipline on both the debt and the equity side,” said Peter Stelian, managing principal with Blue Vista Capital Management, at the NMHC conference. “We’re definitely concerned about Fayetteville, Ark… San Antonio and College Station [in Texas] also.”
Other student housing markets challenged by too much development include Los Angeles, Charlotte, N.C. and Minneapolis, according to investors at the conference.
However, the student housing business is also incredibly local. That’s because students often want to be just a short walk away from campus. Many markets remain strong. “You can have two colleges 10 miles apart with totally different markets… Each market is incredibly unique,” says Arbury.
Investors also worry about weakening demand. The number of students attending colleges of all kinds dropped in 2012 for the first time since 2006, by around 500,000 students, according to data from the U.S. Census. However, “the decline was largely in the 25-29 age cohort,” according to Baird. “By contrast, enrollment in the 20-21 age cohort was up 100,000, and still represents the largest group of college enrollment.”
Investors have also worried about the availability of student loans, and the willingness of students to borrow. “Simply put, the student segment most served by the REITs are graduating with no or manageable levels of student debt,” according to Baird.
Competing for the business
Student housing executives at the NMHC conference agreed that their business was “maturing,” according to Arbury. Many felt that the days of big rent growth were behind them. They now focus on fine tuning leasing and operations to be able to still increase rents.
That means choosing the right location and the right amenities for a property. Students demand very fast Internet connections, for example. As a rule, Internet speed in student housing should be as fast as Internet speeds on campus.
Also, developers who are opening new communities must be sure to open on time for the school year. “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,” said Donna Preiss, founder and CEO of The Preiss Company, at the NMHC conference. That’s a huge problem for student housing developers.
“At the beginning of the school year you’ve got three or four days to completely turn over the property,” says Arbury.
If a mismanaged community somehow misses the brief opportunity, the building could suffer high vacancy for the rest of the school year.
This article was republished with permission from National Real Estate Investor.