Is Student Housing Overheated?

WASHINGTON, D.C. — There is no indication yet that problems in the economy have impacted the business of American Campus Communities, a developer and manager of student housing communities, according to the company’s president and CEO, Bill Bayless.

However, at the National Multi Housing Council’s student housing conference in the nation's capital this week, Bayless noted that “even in this economic environment, students will pay a premium for proximity to campus.” It is the asset characteristics, he maintains, that drive net operating income of a student housing portfolio, rather than the overall economic climate.

Despite the positive characteristics, Bayless believes overbuilding presents a threat to the sector. The fact that lenders are now more cautious and require more equity from borrowers should cool the sector down in stark contrast to the last few years when many deals received financing that shouldn’t have.

David Adelman, president and CEO of Campus Apartments, another developer and manager of student housing, agrees. He says that these days “amateur hour is over” and equity is back in charge.

While there is a lot of business potential in college campuses, it’s going to be a period of adjustment. In the capital markets, Fannie Mae and Freddie Mac are the primary source of liquidity for the sector. Richard Martinez, a Freddie Mac managing regional director, indicated at the conference that in terms of financing student housing, it is business as usual at Freddie Mac. They continue to be interested in properties with experienced operators that are located relatively close to campus, he said.

There is also bound to be some amount of negative impact when a potential student’s parent loses a job, gas prices rise to $4, and when students can’t get loans. If there is any negative impact from the ailing economy, it will be felt next year, Adelman predicts.

Jared Schenk, principal of Schenk Realty Group, noted that in the current environment, with the government in the process of putting together the largest bailout plan in history — whether the worst case scenario is near or not — there is a certain panic in the financial marketplace and people are scared about losing their jobs.

One positive factor for student housing is that people will go back to school in bad times. And the 2008 high school graduating class, the base for the freshman class at colleges across the country, is the largest ever.

In terms of selecting investment opportunities, the devil is in the details and Schenk sees assets within walking distance of campus as offering the best investment potential. Schenk has shied away from tertiary and trade schools.

People are going to college to get the best education possible and the pool of potential students for the largest public universities is deep. This means if one prospective student decides not to enroll, another one will. However, further down the ladder, students will be wondering if the prospect of going to school — and perhaps taking on additional debt — will pay off.

In today’s more fearful economic environment, students and parents are focusing more on whether they can afford to pay more for student housing and if they can afford to drive to school every day. Five years ago, they did not ask themselves such questions. This is not to say “location will always trump luxury,” according to Schenk, who also sees a sweet spot where “convenience and luxury collide.”

In terms of cap rates, Linwood Thompson, a managing director at Marcus & Millichap, noted at the conference that there has not been much impact on cap rates for Class-A properties in primary markets, but there has been as much as a 100 basis point rise for Class-C properties in tertiary markets.

Schenk expects that investors will continue to covet student housing properties. “Core locations at core schools should be our signposts,” he concluded.

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