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Student Housing REITs See Growth Potential in Public-Private Partnerships

American Campus Communities and EdR sit at the forefront of P3s in student housing, according to Jaclyn Fitts, national director of student housing at CBRE.

Two publicly-traded student housing REITs are increasingly turning to public-private partnerships to boost growth.

In their third-quarter earnings calls, executives at the two REITs—American Campus Communities Inc. and Education Realty Trust Inc. (now branded as EdR)—described interest in public-private partnerships for on-campus student housing as strong.

At Austin, Texas-based American Campus Communities, William Talbot, the REIT’s chief investment officer, reported in late October that it had completed or was working on 19 public-private partnerships for on-campus housing projects totaling $1.1 billion in development costs and 12,200 beds. In addition, Talbot indicated the REIT was tracking nearly three dozen potential public-private partnerships, known as P3s.

At Memphis, Tenn.-based EdR, Chairman and CEO Randy Churchey told Wall Street analysts in late October that so far in 2017, the REIT had been awarded five on-campus student housing projects through P3s and was pursuing more than 30 other similarly-structured projects.

“I am pleased with the movement we are seeing in the on-campus market,” Tom Trubiana, president of EdR, said in an October news release. “The pursuit of these developments is very involved and time-consuming, and we are excited to see our hard work paying off.”

Colleges and universities continue to embrace P3s to replace outdated on-campus student housing as funding pressures persist at both public and private schools, according to Churchey. Among the many schools that are considering or are involved in student housing P3s are Arizona State University, California State University, Cornell University, Lehigh University, Mississippi State University, the University of California, the University of Kentucky and the University of South Carolina.

Meanwhile, American Campus Communities and EdR sit at the forefront of P3s in student housing, according to Jaclyn Fitts, national director of student housing at commercial real estate services company CBRE.

Fitts says that on-campus student housing, rather than off-campus student housing, is “where the growth in the industry is going.” This comes as schools seek to replace antiquated on-campus housing and make room for expanding student populations, while also trying to hand off at least some of the responsibility for housing development and management to third parties.

“They’re not in the housing business,” Fitts says of colleges and universities. “They’re in the education business.”

Still, higher education is a business, so schools are having to accommodate students’ demands for on-campus housing that’s on par with newer, amenity-rich options off campus. P3s can give colleges and universities an edge in that competition.

For the REITs, one of the advantages of P3s is that many colleges and universities require freshmen and sophomores to live on campus. With that kind of mandate in place, the REITs enjoy a stronger likelihood that occupancy for on-campus developments will be high, according to Fitts. In turn, the REITs stand a better chance of pocketing more money.

P3s are a “solid investment” for the REITs, as they can reap both development fees and property management fees from on-campus projects, Fitts says.

Generally speaking, P3s in the student housing sector fall into three categories, according to The Scion Group, a Chicago-based student housing owner, operator and adviser:

  1. Referral—A college or university directs students to the third party partner’s property in exchange for concessions, such as discounted rent or payment of a nominal fee. Under this model, the developer typically owns, delivers and operates the property.
  2. Affiliation—A college or university directs students to the third party partner’s property as if it were part of its own inventory and as if it had some control over operations. Under this model, the developer usually owns and delivers the property, but the handling of management responsibilities varies.
  3. Structured—A non-profit entity issues tax-exempt debt to finance the project, and the entity’s board controls all aspects of delivering and operating the project. Under this model, the non-profit entity typically owns the property, with delivery of the project being assigned to the developer or construction manager and with the handlers of management duties varying.

While the popularity of P3s is rising in the student housing sector, there’s not been a “wildfire spread” of these partnerships, according to Michael Orsak, senior vice president of investments at Austin, Texas-based Campus Advantage, which specializes in development, acquisitions, property management and consulting on student housing. Orsak estimates just 5 percent to 10 percent of on-campus housing projects in the U.S. are being done through P3s.

Still, Orsak figures the number of P3s in on-campus student housing will keep going up, in part because these partnerships help solidify investment returns for the student housing REITs and rival developers.

While the returns are lower for on-campus projects than off-campus projects, the risks also are lower, Orsak says. On-campus projects are “almost assured to fill up every year,” he adds.

“Real estate fundamentals will tell you, ‘Location, location, location.’ You can’t get any better location if you’re a student housing provider than being on campus,” Orsak says.

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