Is Student Housing Making the Grade?

By Kevin White, Director of Student Housing Acquisitions, Virtus Real Estate Capital: The dynamics for student housing investment have shifted over the last six months, igniting key trends that will likely continue in 2014.

Kevin White PictureThe dynamics for student housing investment have shifted over the last six months, igniting key trends that will likely continue in 2014. Key players in the space, along with the rising cost of debt, are now changing the landscape with private investment in the industry.

For the first time in a long time, REITs, historically the largest source of capital for student housing acquisitions and development funding, are on the sidelines and for good reason. Since the second half of 2013, REITs such as Education Realty Trusts (EDR) and American Campus Communities (ACC) have each lost 25 percent of their market capitalization.

A common popular exit strategy for student housing developers, REITs, have begun to shift from being aggressive buyers to becoming sellers as their stock prices have tumbled leaving them with less equity to continue to buy assets.

With less clear takeout and development yields decreasing due to rising land and construction costs, developers are getting squeezed both on yields and exit caps.  The lasting impact this will have on student housing development over the short term is yet to be seen. However, the door is definitely now open for private investment to take advantage of this new environment.

Surveying 2013, it’s also easy to see that student housing transaction volume was considerably less comparably from the previous year; this can be linked to the interest rate adjustments that took place mid last year and the high volatility in the 10-year treasury yields. In short, the cost of debt year over year has gone up a full percent leading to a slower volume of deals. And, private institutional investors remain active and are seeking the right opportunities.

Leveraging the increasing void in investment from the public side, private investment in student housing will only continue to increase in 2014. As an asset class in itself, student housing demand will remain strong and continue to grow.

While student loan debt and the rising cost of tuition have led the headlines lately, leaving many to negatively speculate on investing in student housing properties, it’s clear there continues to be overwhelming public support in the value of a college degree. And strategic moves by top-tier schools to freeze enrollment and lock in current costs will also serve to fuel opportunities within this market.

Looking forward to fall 2015, the 18-month funding cycle for the next round of student housing development opportunities is now open. As key decisions are being made from now until June 2014, we at Virtus Real Estate Capital are closely monitoring all activity to see how these effects will play out on this asset class.

We look forward to 2014 and the opportunities it brings with student housing.