New Lenders and Borrowers Alike Go Back To School, Pursuing Student Housing
The student housing sector continues to heat up as this once-niche market goes mainstream. Student housing is offering opportunities and stability that major asset classes currently are not. Seeking returns, strong market fundamentals and deal opportunities, new capital providers and new borrowers alike are expanding from market-rate multifamily into student housing. Yet while the players may be increasing in number, the market remains stable, with surprisingly few changes since this time last year.
At the annual Interface Student Housing Conference in Austin, Texas, the record-breaking number of attendees reflected the increased attention from industry professionals toward this stable and high-yielding asset class. “Power Panel” moderator Peter Katz reinforced the notion of a strong market, pointing to the industry’s sustained year-over-year net operating income growth (NOI) along with the entry of institutional capital and private equity into the market. Katz’ sentiments were echoed throughout the day by many industry professionals, including Bill Bayless, CEO of American Campus Communities. Bayless attributed the strength of the market to the stability of cash flows, rising property values and cap rate compressions.
As part of a panel on Capital Markets Update: Who’s Lending, Where are Rates and Pricing, and Will New Entrants Challenge the Agencies and Traditional Capital Providers, I spoke with industry leaders from all corners of the student housing business: investors, private equity executives and student housing managers.
New players bring new opportunities
Fleeing the traditional multi-family sector where deal flow is slowing and cap rates are shrinking, the student housing sector offers a similar product type, with comparatively more current opportunity. Student housing is presently offering higher cap rates and greater cash-on-cash returns than multifamily. In fact, institutional investors are currently seeing a 0.5 – 0.75 percent greater return on investment (ROI) from student housing compared to regular multifamily deals. Both direct and secondary investors have taken notice. Large foreign and U.S. institutional funds such as Blackrock are teaming with experienced sponsors in the field to structure 90-10 equity splits, as part of their forays into the market. For lenders, the key word is experience; with new equity sources and new borrowers in the market, every project is being carefully reviewed to ensure that an experienced operator is on every development or acquisition team, with executives who understand the significant differences between multifamily and student housing. Without experience in this sub-sector, it would be easy to make operating errors related to leasing practices or rapidly-shifting market cycles.
Looser pockets leading to tighter markets
Heightened attention to student housing from both capital providers and borrowers is leading to increased competition among market players. The overabundance of capital from multifamily that has begun to flow towards student housing is starting to flood the market, driving cap rate compression and squeezing returns on investments. And yet, student housing is still thriving and hasn’t yet become over-heated. In fact, the influx of new borrowers is also opening up new options on the lending side. Banks and life companies are not the only institutions offering support; debt funds have come into the market for more value-add, turnaround type deals, and CMBS continues to fund certain student housing investments. While increases in lending options are driving a decline in interest rates, competition between lenders is increasing. However, it is not yet as heated as the current competition to finance core multi-family investments.
Although the market is tightening, the overall outlook for student housing is still rosy: rental rates are forecasted to rise again in 2018 by 3.4% (an increase from 2017’s growth-rate of 3.3%) with leasing and occupancy rates also on the rise. Combined with growing student enrollment and an insatiable demand for amenity-rich housing near campus, the sector appears to offer a sustainable avenue of growth for both sources of capital and borrowers.
With all the new players in the industry, it is more important than ever to seek out and gain insights from experienced professionals who understand the market. At KeyBank Real Estate Capital, we are dedicated to the student housing sector, offering capital options including construction debt, interim bridge financing, and a wide variety of permanent debt options.
Charlie Williams, Senior Vice President at 720-904-4449 or firstname.lastname@example.org.