Student Housing Business

JAN-FEB 2018

Student Housing Business is the voice of the student housing industry.

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CAPITAL MARKETS UPDATE January/February 2018 StudentHousingBusiness.com 44 Off and Running The student housing investment sales market is off and running for the year. Will 2018 break 2016's big record? Early indicators are promising. By Randall Shearin A As is par for the course this time of year, the student investment market is slow to fully kick into gear. But activity is off to a promis- ing launch for 2018, according to investment sales brokers and buyers who are beginning to see more interest and potential listings from sellers. The year started off with the news that Scion Student Holdings — the joint venture between The Scion Group and international institutional funds CPPIB and GIC — had acquired 22 assets from Harrison Street for $1.1 billion. Likely, due to the closing date, that transaction will count in 2017's final numbers, bringing the year's total somewhere around $8 billion. Numbers are still being tallied from December sales, but early reports indicate that 2017 — while very strong — was not a record- breaking year. "In 2016, we had several big portfolio deals," says Chris Epp, principal with Four Point Stu- dent Housing. "Last year, there were several portfolio sales, but they weren't of the mega size that we saw in 2016. That is what will keep us away from setting a record. We did see a number of individual sales and sales of smaller portfolios during the year, which generated an enormous amount of volume in the student housing space." Removing the $1.8 billion Campus Crest/ Harrison Street transaction — which was atyp- ical for the industry — from 2016's $10 billion total, 2017 is on par with the numbers from the year before. Investment sales professionals reported that interest in proper- ties that are listed on the market is strong, as long as the properties are priced realistically and they fit buyers' needs. "There is a lot of appetite out there," says Wil- liam Vonderfecht, associate director and co-leader of the national student housing team at CBRE. "We are see- ing strong demand for both core and value-add properties. We recently completed marketing a value-add property for which we received more than 30 offers." "From my perspective as an owner, there was still activity going into the end of 2017, while in years past it seemed there was a bit of a lull at that time," says Roger Phillips, prin- cipal and CEO of TEXLA Housing Partners. "There are, of course, deals still being actively marketed and pursued not unlike any other time. Buyers look to be herding around the better located — geographically and by mar- ket — deals. The deals that have inferior ages, locations or markets are at an impasse, given that sellers expect top-of-market pricing and buyers aren't willing to push there." Buyer Profile Changing One big difference that many long-term industry players have seen over the past few years is a change in the sophistication of the investment sales market. It is hard for indi- vidual owners to buy one property, and harder still for larger companies to buy a few assets to test the waters with student housing. "As the indus- try continues to consolidate, it is tough to dabble in the sector," says Avi Lewittes, chief investment offi- cer for The Scion Group. "It is hard to be an accidental tourist in student housing today. You either have a vision and a strategy, and access to capital that will enable you to be a long term player, or you are developing, selling and moving to the next project. People are staking out positions in the market and recognizing the benefits of focus and discipline — a sign of evolution for the industry." Related to this, it is hard for a smaller buyer who is not familiar with the sector to acquire a single asset in a top tier market. Several years ago, this wasn't the case. Today, larger buyers prefer scale, acquiring portfolios rather than properties one-by-one. Many one-off proper- ties are being sold by institutional owners who are pruning their portfolios to assimilate their assets. For larger buyers, to play in the game today means you have to come to market with your best foot forward, and have clean execu- tion with deals. "There's a diverse crowd of investor types cur- rently in the mar- ket," says Doug Kligman, chief investment officer at Vesper Hold- ings. "Over the past decade, institu- tional investors and sovereign wealth funds have estab- lished equal foot- ing as buyers with the private equity shops, syndicators and REITs." Sales Pricing Cap rates have held steady in the market over the past 18 to 24 months, bifurcating between value-add properties at the high end and core, pedestrian-to-campus assets at the low end. In Tier 1 markets, TSB Realty reports core assets trading between 4.75 percent and 5.25 percent, with cottage product trading between 5.25 percent to 5.5 percent. Value add properties have a wider swing in the range, according to Austin Repetto, principal of TSB Realty, because the properties are not typi- cally stabilized and the strategy to turn them around can differ from buyer to buyer. Inter- estingly, traditional multifamily assets, which have cooled slightly in popularity with buyers over the past two years, are trading at about the same levels. "We have seen a fair amount of convergence around property valuations in the 5.25 to 5.75 percent cap rate range for high quality product in Tier 1 and top Tier 2 markets," says Lewittes. "It is now less about continued cap rate compression generally and more a func- tion of higher quality value-add opportuni- ties being bid up to near core and stabilized pricing levels, resulting in a reduced cap rate WILLIAM VONDERFECHT Associate Director and Co-leader of the National Student Housing Team, CBRE DOUG KLIGMAN Chief Investment Officer, Vesper Holdings AVI LEWITTES Chief Investment Officer, The Scion Group

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