As the COVID-19 outbreak approached the United States, many colleges and universities went into complete lockdown mode. Also, this year hasn't been the most usual.
A growing number of colleges and universities have returned to traditional classroom instruction as vaccines are pushed out across the nation. Consequently, the housing market on and around campus is once again flooded with students looking for places to live.
Because of this, it's not surprising that investors are once again interested in this commercial sector as demand for additional student accommodation increases.
Walker & Dunlop's Chris Epp, managing director, specialises in student housing.
When it comes to commercial real estate, he believes that the second half of 2021 and the first half of the following year will be pretty busy, with developers increasing the supply of student housing around schools throughout the United States.
This week Midwest Real Estate News caught up with Epp about housing for students amid an influenza outbreak. Here are some of the things he said.
Chris Epp: Many college students are opting to live off-campus in higher-end private student housing. They are looking for all the amenities and space that might provide peace-of-mind for their parents who are footing the bill. And this trend is likely to continue. Vaccines were a game-changer for colleges and universities. With a widespread return to in-person classes, student housing experts are seeing investors and developers flocking to Class-A student-housing properties.
Epp: I segment student housing in two groups: pre-2010 and after 2010. Pre-2010 was like the Animal House days. It was John Belushi in front of a frat house with the gang. That was student housing as people used to know it. No one wanted to invest in it. Kids tore the places apart. They featured nine-month leases. It wasn’t attractive to investors.
But we started to see the modernization of student housing after 2010. First, you saw professional management come in. Then you saw the development of more modern buildings. The managers knew what the kids were looking for. They wanted to be close to campus.
But they also wanted their own bathrooms. They didn’t want to share sinks and toilets with other students in the building. The owners started enacting joint leases. If everyone is on the lease and one student parties too hard and fails out of college, the rest of the roommates don’t have to pick up that students’ rent. The parents of the student who flunked out do. That changed everything. It allowed kids to say, ‘Yes. I am paying a lot to live here. But if one of my roommates flakes out, I’m still good.’
From 2010 to today, it’s been a rocketship screeching toward the moon in terms of sophistication of product and management. Today, the product is a better fit in Las Vegas on the strip than what you used to see in Tempe next to Arizona State University.
Epp: Kids during the past 10 to 12 years have gotten used to the fact that there are new properties delivered every year. The amenities race has ratcheted up in an extreme way. And with some oversupply in some of these markets, rents have not skyrocketed as much as you’d think. Kids are good at shopping for the newest and nicest properties. And they can afford them.
Epp: It used to be things like golf simulators, lazy rivers and tanning beds. Those amenities always had that ‘wow’ factor. Students would come in and say, ‘This place has a golf simulator! I’ll use that every day.’ The reality, though, was that you’d use it when you were about to sign the lease and never go back. Folks in the development world realize that those amenities have gone out of fashion.
But what will never go out of fashion is location. I’d prioritize the amenity of having the right location over the amenity of having an awesome pool. Location is number one today. That’s the main driver. I’ll also say that by their junior years, many students no longer want to live with four people in a room. So rooms with smaller bed counts are an amenity, too.
Epp: If you can find a way to be between the bars and classes, you have found the bullseye. There are a lot of developers who have done this. Their buildings are close to entertainment and nightlife, the cultural district. Then, if they are also close to where students have their classes, that makes it an ideal location. If you can be in a pedestrian-friendly area at the same time, that’s perfect.
Epp: In big, state-supported school systems, their mandate and mission is to educate kids. Outside of that, housing, feeding, clothing, those aren’t automatic mandates. They let housing fall to outside, third-party folks such as developers. The university is there to educate, not to worry about housing.
The other segment is the private world, the SMUs and the Baylors, the Notre Dames. The mandates there are to educate, house, feed and clothe students. These schools are very entrepreneurial. They are very business minded. They see a revenue stream in providing high-quality housing, so they attack that goal of providing housing.
One of the big trends in this second segment of colleges is the P3 model, public-private partnerships. You might be a university that needs to show parents that you are offering kids quality housing. But you might not have any desire to run and operate that housing.
So you work with a private developer that builds it and maybe manages it. Universities can then avoid the risks associated with housing. The people building the properties have the benefit of guaranteed renters. That takes the scariness of supply-and-demand metrics off the table.
Epp: We have been subject to the same supply-and-demand issues for lumber, steel and workers as everyone else. We were also acutely subject to the challenge of underwriting to perfection. In student housing, the Achilles heel has always been an oversupply in big markets.
You’d always have two or three products being developed in places like Austin or at Florida State. And really, those markets didn’t need that much new product. Some of these markets had real occupancy issues.
During the pandemic, with kids questioning whether to go to school and with international enrollments dropping, a lot of equity and debt folks said that they needed to see the perfect scenario or they wouldn’t provide funding for student housing.
For 18 months there, if you were within that perfect bullseye, you were good to go. But if there was just one papercut on the deal, it was pencils down. Lenders wouldn’t do it.
That stinks for some developers. But for the overall health of the student housing space, it’s been a good thing.
It slowed development. Development in this space is at a more realistic pace now. In large part, college enrollments are back to more normal levels now. Now student housing faces the normal headwinds that other sectors face.
Epp: To me, it’s more about private developers venturing into newer markets. For instance, I’m seeing a lot of developers breaking into the schools in the Mountain West area. There are a lot of big schools in the Mountain West that need new housing. That is exciting. There’s been a lot of over-development in some of the markets in the SEC. Developers are looking to expand into new regions.