About a decade ago, when looking for a real estate investment trust (REIT) to put into my stock portfolio, I chose American Campus Communities Inc., an Austin, Texas-based company that specialized in developing and managing student housing.
I enjoyed the REIT dividend and was pleased that the stock held its own through the heart of the recession when the rest of the market tumbled over a cliff like a long line of lemmings.
Otherwise, I really didn’t pay much attention to the student housing sector; then over the past year a couple of items caught my eye. First, toward the end of 2010, Campus Crest Communities Inc. of Charlotte, N.C., a student housing REIT unknown to me at the time, went public, generating net proceeds of $350.6 million.
Then I stumbled upon an interview with a REIT analyst, who, when asked by the interviewer about his favorite companies in the apartment sector, mentioned the two best-known student housing REITs: ACC and Education Realty Trust Inc. of Memphis, Tenn.
Since Campus Crest was new news to me, I decided to give the company a call to see what was up with student housing, which can be defined as off-campus, for-profit housing for college students, or cooperative developments with universities to create student housing on-campus.
First, a little background: Campus Crest was founded in 2004 by two Duke University business school buddies, Michael Hartnett and Ted Rollins. The latter serves as co-chairman and CEO, while Hartnett shares co-chairman responsibilities plus sits in as chief investment officer.
The company’s May recap of first-quarter business reported average occupancy had risen 100 basis points to 88.6 percent as compared to the same period a year ago, which seemed to be an average performance considering the bigger competition, ACC and Education Realty, were boasting average occupancy above 90 percent. A little better was same-store net operating income, up 5.1 percent as compared to first-quarter 2010.
The company suffered a bit of softness during the recession, which was surprising, as it appeared the sector was almost recession-proof.
Not recession-proof, Rollins corrected me, "recession-resistant."
Retail, industrial, office, lodging and even the apartment property sectors experienced, as Rollins said, "a material shift in occupants," which was a technocrat’s way of saying everybody escaped town leaving nothing behind but empty space. That didn’t happen to student housing. However, due to one or both parents either losing a job or just the fear of unemployment, student decisions on housing were delayed. Secondly, rental rates flat-lined.
Heading out of the recession, as the economy recovers, "We are now seeing less price sensitivity," Rollins said. "We see a little uptick — after all, education is a fundamental expense for mom and dad."
Except for the apartment sector, owners of hotels, industrial buildings, offices and shopping centers still have to worry about whether the trend lines going forward will be beneficial to their sectors and empty space worries will finally dissipate.
Here’s where student housing goes its own rebellious and separate way from its brethren in the property sector. The tea leaves portend munificence.
Demographically speaking, the children of the baby boomers (echo boomers) are reaching the peak of their college attendance years; a higher percentage of high school attendees are graduating; a higher percentage of graduates are electing to attend college full time; and the average time period that young adults attend college has been stretching from four years to five years and beyond.
"We have this demographic wave of echo boomers that is almost the size of baby boomers," said Paula Poskon, "a REIT analyst with Robert W. Baird & Co. Inc. "Projected college enrollment is predicted to be quite strong for probably the next decade."
According to the National Center for Education Statistics, college student enrollment will continue to increase through 2019.
All of this means universities have to prepare for more students and how to house them. Unfortunately, many schools are already working from a position of weakness, and with state and city budget crises, the situation won’t get any better.
"Universities are ill-equipped to meet this growing demand because they have housing inventory that is old and obsolete, and they don’t have the money, expertise or desire to build new housing," said Haendel St. Juste, a REIT analyst at Keefe, Bruyette & Woods.
"In addition, the large state schools are dealing with budget caps. When you talk about funding to build new housing, this is not at the top of the priority list."
This is where the private sector comes in.
"The student housing REITs have the development capability, but more importantly they have access to capital via the public market. And also, because they are large, established organizations they have access to construction financing to meet this need for housing," St. Juste said.
While new construction elsewhere remains dismal, Rollins said his company is completing six projects this summer and will be kicking off another six to eight developments in the autumn.
"Student housing remains a highly fragmented industry," Poskon said. "There are three publicly traded REITs, but there are a whole slew of local and regional players, some of which are sizable" — which can be a problem because it is relatively easy to overbuild small college markets.
Student housing revenues are less affected by economic forces such as job growth, changing interest rates, the spread between cost to own vs. rent, and the strength or weakness of the homebuying market, Poskon said. "Most people think about student housing as a tangent to multifamily, but the drivers are different: enrollment for student housing, and job growth for multifamily."
And, oh, by the way, none of this should hurt the small-time real estate investor who buys a house or two near a campus for student rentals. The evolution of students’ housing needs hasn’t changed since the 1950s: freshman live in dorms; sophomores and juniors stay in dorms or move to apartments; seniors and grad students find a rental house.
There’s no new learning curve for this business.
