Perfecting the Development Pitch for Student Housing Photo by Brian Henniker and John Bare

Perfecting the Development Pitch for Student Housing

Developers who want to attract investors to their student housing deals should practice their pitch.

“Know your numbers. Know your market. Do your homework,” says Dorothy Jackman, managing director of the student housing group for Colliers International.

That’s also the advice she’s giving participants in DealTank, a special session Jackman is co-hosting as part of the program for the National Multifamily Housing Council’s September Student Housing Conference.

During the 90-minute session, as many as eight student housing developers will present development and redevelopment deals to a panel of potential investors, including executives from leading private equity firms Kayne Anderson Capital Advisors and Harrison Street Real Estate Capital and top real estate investment trusts (REITs) EdR and American Campus Communities (ACC). It’s a unique opportunity for industry participants to pitch a real deal to actual decision makers.

“We put a cast of characters together who are going to provide interesting and entertaining feedback,” says co-moderator Steve Helfrich, vice president of business development for CampusWorks.

There is a possibility that one of the panelists will decide to invest in one of the deals presented to them. “Maybe it results in a future ACC development or presale opportunity,” says William Talbot, chief investment officer and executive vice president for ACC.

All eyes on infill

Student housing has become very attractive to equity investors like REITs and private equity funds. “There is definitely a lot more capital coming into student housing,” says Helfrich. Development and redevelopment opportunities give these student housing investors higher investment yields than they can find by buying stabilized student housing properties.

But good development deals are getting harder to find. “There are no longer as many deals,” says Helfrich. “There are fewer and fewer opportunities.”

Across the country, developers are creating fewer new student housing beds. A little less than 50,000 new beds will join the market in 2016. That marks a slight decrease from the 50,100 new beds opening for the fall of 2015 and significant drop from the 63,000 new beds finished in 2014, according to data firm Axiometrics.

Development sites close to campus are becoming difficult to find and take much longer to assemble and entitle. “We believe that is what has caused the recent decline in new supply across the student housing market—ACC has seen a 28 percent decline in new supply over 2014 in our same-store markets,” says Talbot.

Development sites are scarce because student housing developers now compete to build on the limited number of sites within walking distance of large universities. All the new student housing properties that ACC plans to open from 2015 to 2018, totaling $1.2 billion in development, will be in core markets with an average distance to campus of under 0.1 miles. Developments close to campus meet ACC’s longstanding investment criteria, offer the best long-term value and provide the highest net operating income, according to Talbot.

However, these infill development projects pose challenges for would-be developers. Developers often have to squeeze more housing beds onto sites as small as half an acre. Instead of sprawling, traditional developments of three-story, wood-frame apartments, many developers are building mid-rise buildings or even high-rise properties—with parking structures typically made of concrete—to achieve the necessary densities. Because of the complexity of development work, local governments may require lengthy approval processes. “These are very challenging construction projects,” says Helfrich.

Countertrend opportunities

With so much competition jockeying for infill positions near large universities, some developers are switching strategies and targeting sites near universities with fewer than 10,000 students. “We are also seeing people build smaller projects in smaller universities,” says Taylor Gunn, research analyst for student housing at Axiometrics.

Some investors resist the urge to follow these developers to smaller schools, however. “Smaller tertiary universities tend to be more susceptible to fluctuation in enrollment and new supply,” explains ACC’s Talbot. “We see a higher risk profile to long-term ownership in those markets.” ACC focuses primarily on large, tier-one universities that either have enrollment over 15,000 students or are a flagship within their respective state. That still includes a large number of schools. “The opportunity set equals 280 universities with over 6.3 million students,” says Talbot.

Developers may also find opportunities by building more affordable student housing. Most new student housing properties feature high-end products and expensive amenities that push rents higher. “It seems like a lot of developers are trying to outdo each other, going after that top 10 percent of students who can afford the most expensive properties,” says Helfrich.

Helfrich estimates that roughly 40 percent of all students will live in off-campus housing but won’t be willing or able to pay the high rents at those primo properties. In an effort to reach this substantial tranche of the student market, some student housing firms are seeking properties located a little further from campus or redevelopment opportunities with existing student housing properties, where they may be able to charge students less in rent.

Given the shifting landscape in the student housing market today, DealTank’s participants have a lot of homework to do before bringing their best pitches before the savvy panel of student housing investors.

Think you might have the best deal? Sign up for the DealTank.

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