Student Housing Business

MAR-APR 2018

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

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THE SHB INTERVIE W March/April 2018 StudentHousingBusiness.com 36 it has been a strong and steady market to date, but to generate the creative competitiveness that we are seeing, it means we are going out to more debt sources in addition to Freddie Mac and Fannie Mae. At TSB we are becom- ing more active in underwriting larger portfolios and recapitaliza- tions as some of the big developers are looking to hold their projects longer — groups like Landmark Properties and CA Student Living are looking for ownership struc- tures under which they will own for five to seven years now versus selling when the paint dries — another factor adding to cap rate compression. SHB: What does that mean for the industry? Bradley: For the short term, it means there is potentially less product that goes to market for sale, with even more capital chas- ing it. There are a few core port- folios in the market or under escrow currently and we expect these portfolios to trade around a 4.5 percent cap rate on post sale adjusted taxes. We see this trend continuing in 2018 even with the uptick in the long-term rates. SHB: Is there too much capital in student housing today? Bradley: We always urge new investors to partner with a group that has experience, like CPPIB/ GIC, Goldman Sachs and AGC Equity Partners have done in the space via deals with Scion, Landmark Properties and GMH, respectively. Do I think there is too much? Honestly, no. It is really a question of how much of that capi- tal will actually be deployed in the student housing sector with the lack of available core properties. We are seeing more investors seek value-add or basis plays due to a healthy amount of this product available with potentially higher yields into the mid-teens. There will be more entrants to the space. Will they be more aggressive on their underwriting to acquire? In certain situations, yes. As we see more core to core-plus institution- al capital enter the space, we see the most competition for proper- ties at larger public universities pedestrian or adjacent to campus. There is also more liquidity on the exit if the property is located in close proximity to a major CBD. Student groups are strategically putting together portfolios with assets in well-known markets that any international investor would recognize. The cost of capital seek- ing core to core-plus properties have provided the space addition- al investors with a 6 to 8 percent unlevered return profile, which has been one of the drivers behind the strong pricing on assets traded over the past 12 to 18 months. SHB: Are we in a frothy environ- ment right now? Bradley: With interest rates going up as they have, it would be dif- ficult to say that we should not anticipate some fluctuation in cap rates but we haven't seen it yet. With a number of large portfo- lios acquired privately in recent years, not enough time or infor- mation has passed to determine if the long-term results prove out the purchase prices. Conversely, when ACC and EdR buy some- thing, we all see how their invest- ment turns out in the short term, in post-acquisition performance and returns. We think a better term for the market today is 'competi- tive,' but due to the overall size of the student housing sector, it does not take a lot of new billion-dollar investors or funds to make it seem frothy. However, student hous- ing has continued to perform well since the Great Recession as one of the best risk adjusted returns in real estate. Due to allocations some investors already have in the four major food groups, we are seeing investors begin to allocate more capital to the student sector for diversification. SHB: Traditional multifamily has cooled off over the past year or so. How do you compare that sector to student housing, which seems much more active? Bradley: We've seen cap rates more affected on convention- al multifamily properties with the rise in interest rates than we have in student housing. We will arrange over $1 billion dollars in financing this year on the perma- nent side alone and we have seen the 10-year Treasury rate increase nearly 60 basis points in a very short period of time. For core, quality student housing we have not seen cap rates go up. We are in the range of 4.5 to 5 percent on cap rates for core, pedestrian- to-campus student housing proj- ects at large state universities. 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