Landmark College Park

Infill Is In

Most of the new beds expected to hit the student housing market before the fall are in infill locations adjacent to campus.

The Standard at Knoxville won’t open until this fall, but students have already signed leases for 95 percent of the beds. “Preleasing has exceeded our expectations,” says J. Wesley Rogers, president and CEO of Landmark Properties, developer of the new 672-bed student housing community in Knoxville, Tenn.

While the property’s resort-style pool, 24-hour study lounge, state-of-the-art fitness center, game room and in-unit premium finishes are all selling points, the biggest driver of demand for the property is one thing: location. “The project is right across the street from the University of Tennessee and on the main drag,” says Rogers.

As student housing developers plan to open tens of thousands of new student housing beds across the country this year, many of them will be in infill communities located mere steps from campus classrooms. These so-called “roll-out-of-bed” locations are outperforming, leasing up faster and often commanding rent premiums as students put a price tag on convenience. Prized locations pedestrian to campus also help protect these new developments from competition.

However, infill development comes with its unique challenges, not the least of which today is finding enough skilled workers to help them finish their new communities in time for the start of the school year.

Production and Preleasing

Developers are planning to open 45,000 new beds at privately-owned student housing properties in time for the 2016-2017 academic year that starts this fall. That’s the fewest number of new beds to open in any year since 2012, when the most recent development boom began. Developers created more than 60,000 new beds in both 2013 and 2014, and they created 48,000 last year, in 2015.

“This moderating level of supply is helping to drive strong performance across the sector,” says Taylor Gunn, student housing analytics lead at data firm Axiometrics, based in Dallas.

While production has come down off historic highs, student housing developers are still delivering a decent volume of beds compared to earlier real estate cycles. The 45,000 beds that are slated to open this fall are still more than developers opened in any year before 2012. The biggest years in that earlier era—2001, 2006 or 2008, for example—were much smaller in comparison.

Shifting demographics and growing student enrollments are creating strong demand for student housing, allowing the market to absorb most of the new beds being brought to market. The new projects underway are unlikely to flood the market in the near term, and developers are aiming to keep the throttle steady on new construction over the next two years. Developers are planning to open slightly less than 45,000 new beds in 2017 and slightly less than 40,000 beds in 2018.

“There are decades of new supply needed,” says William Talbot, chief investment officer of the nation’s leading student housing developer, American Campus Communities. “We are just hitting the surface.” He points out that only a fraction of college students now live in dormitories or in purpose-built, privately-owned student housing.

That’s one reason this year’s preleasing season is going so well. Privately-owned, purpose-built student housing properties were 60.1 percent preleased as of March for the new academic year that start this fall, according to Axiometrics. That’s 462 basis points better than last year, when the rate of preleasing for the fall 2015 academic year was 55.5 percent.

Core Locations

Nearly all the new student housing planned for 2016 will be located very close to campus. The performance of recent projects has shown that students prefer communities within close proximity to campus,” says Landmark’s Rogers. “For the next few cycles, we expect roughly 75 percent our projects to be urban infill.  Those infill projects will be located an average on 0.1 miles from campus—effectively right across the street.

New properties close to campus are simply more attractive than properties farther away. For example, the new infill properties that ACC is opening this fall are so attractive to students that they are preleasing just as quickly as ACC’s portfolio of existing student housing communities–although the existing communities start preleasing with a massive head start from returning students. Prospective residents often also have limited opportunity to visit the new apartments, which usually aren’t finished until the summer.

While many developers’ focus has shifted to finding those key infill locations adjacent to campuses, one thing hasn’t changed for most of the largest student housing providers.

“We are focusing on large, residential campuses,” says ACC’s Talbot. These four-year colleges need to have a strong residential base to support new student housing developments. Universities that play Division I football generally make the cut. “You can’t support that level of sports program unless you have a strong residential base.” Communities located near these schools are often more attractive to lenders and potential buyers.

But some developers are also finding opportunities to build in locations other than across the street from a Division I university. Smaller schools are attracting new development, although student housing communities at these smaller schools are often more difficult to finance.

This year, developers will open new student housing communities with more than 100 new beds apiece at seven community and technical colleges, including Fox Valley Technical College and Northeast Community College, according to data from Axiometrics. Developers are also opening at least four new communities with more than 100 beds apiece at private universities with less than 10,000 students enrolled, including Marist College, Iona College, Edgewood College and Edicott College.

However, for student housing developers targeting deals near large, tier 1 colleges and universities, some are getting more involved in private on-campus housing opportunities.

For example, ACC plans to open 11 of its 19 new communities–more than half of its development pipeline—on university-owned, on-campus land. This year alone, four of ACC’s seven planned new communities will be located on campus. With each of these four new communities, ACC partnered with a university and leased the ground underneath the new buildings.

“There is no better pedestrian access than housing on campus,” says Talbot. Once ACC builds an on-

campus property, ACC can rest easy knowing that a competitor is unlikely to open next door.

To convince a university to allow ACC to build on campus involves a long wooing process. ACC became a real estate investment trust (REIT) partly in order to give the company the transparency of a public company, which makes ACC more attractive to universities as a potential partner. ACC’s financial strength as a $9 billion company also helps it attract university partners. Credit rating agencies have actually stated that partnering with the private sector can be “credit positive” for universities.

The Challenges

The land around large universities is usually crowded with existing buildings. Infill development often requires developers to squeeze onto tiny sites. They often have to build mid-rise or high-rise buildings to a development density that justifies the high cost of land.

And these sites can be very hard to find–like ACC’s new development site across from the University of Colorado in Boulder. “We looked at the market for 12 years,” says Talbot. ACC finally bought an old hotel building that was eventually demolished in order to build new student housing. It required a zoning approval from local officials before ACC could start construction.

“We bought the hotel and ran it for a few months as a hotel until we completed predevelopment,” he says. “Infill sites are almost always going to have to be rezoned.”

The struggle for top sites is well worth the hassle, though, Talbot says, as student housing is in very high demand around the university. ACC’s other community near the school has been fully occupied since it opened in 2002.

Developers also may have to share their development sites with unusual other uses. “Creativity is required in sourcing land sites as infill land becomes more difficult to obtain and get entitled,” says J.J. Smith, chief operating officer for CA Ventures.

At Uncommon Charlottesville, CA Ventures is building a six-story, T-shaped building with 380 beds that wraps the University of Virginia Core Laboratory. “Construction requires great care with respect to earth vibration and air quality, dust control measures so as to not affect lab testing next door,” says Smith.

CA Ventures is planning an even bolder mixed-use property for 2018. The developer is creating a $100 million, high-rise project near the University of Iowa including a Hyatt Place Hotel with 150 keys, 25,000 square feet of Class A office space and 320 apartments for students. “This could possibly be the first development of its kind in the United States to mix these three uses in one complex,” says Smith.

Moreover, developers may have a hard time finding the workers they need to complete their properties on time.

Delays are a serious issue for any developer, but student housing projects are especially vulnerable. When the students who signed leases arrive just before their first day of classes with all their possessions in boxes, they are justifiably upset if they don’t have a place to sleep.

“We have to be open for August,” says ACC’s Talbot.

The problem is that as the economy steadily improves, construction workers of all kinds are in very high demand. “Labor is one of the most difficult issues in development,” says Talbot. “We are competing with commercial and single-family developers for workers.”

Even though housing starts are still relatively low, many workers once trained in construction have left the business. Some immigrant workers may have even left the country. As a result, subcontractors often arrive at job sites with smaller work crews than expected. Contractors may even be lured away to other jobs. “We saw this in the last cycle,” says Lee Weaver, senior vice president for Northmarq Capital. “Where are all my framers?”

Contractors and developers compete with each other to hire whoever is left. “We will accelerate payment for subcontractors,” says Talbot. “We are known as a developer that pays on time or early. That drives interest in working with ACC in highly competitive environments.”

Some developers are making arrangements to protect themselves in case construction delays strike at their projects. For example, if the last building of a development with several hundred beds opens late, the developer may have to find temporary housing for the several dozen students signed up to live in that last building. “They are worried,” says Weaver of his clients. “They might be calling hotel to buy a block of rooms just in case.”

In one case, ACC told the residents who planned to move into a new community two months in advance that the community might not open on time in August. As it turns out the community opened on time. Although residents were given the chance to cancel their leases, very few did. ACC stands by its decision to notify its residents of the risk that the building might open late. The company’s reputation and commitment to providing good customer service is much more important than the lost income from a few leases.

“If we think there is a possibility of being late, we start communicating with residents, so they don’t feel like the rug was pulled out from under them,” says Talbot. “It can take up to three years to overcome that negative reputation.”

Stable Rents

Most places where the most new beds are opening are absorbing the additional new supply well. Rents have fallen at two of the 10 universities where developers are planning to open more than 1,000 new beds this year.

But the declines are moderate. At Louisiana State University, for example, developers are creating 1,440 new beds on top of the 2,428 that opened for 2015, and effective rents have fallen 1.8 percent. Similarly, at the University of Nebraska in Lincoln, developers are creating 1,256 new beds on top of the 838 that opened for 2015, and effective rents inched downwards by 0.1 percent.

“Developers and operators must really dive deeply into their market study due diligence to understand how any new supply has been absorbed and how it will affect rental rates projecting out three to five years,” says CA Ventures’ Smith.

Overall, the rents at purpose-built, private student housing properties now average $683 per bed for fall 2016, up 3.2 percent from fall 2015. That’s strong performance, significantly faster than the rate of inflation over the same period.

A few markets might suffer through slower rent growth for a year or two while the market absorbs new supply. “But people are very bullish in the long term,” says Travis Prince, managing director of student housing services for Colliers International.

TAGS: Multifamily
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