Student Housing Business

MAY-JUN 2018

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

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one, reconciling with the univer- sity all of the design and economic aspects of it. Two, it's probably not as easy to monetize. Maybe you can sell a stake if you bring in a big pension fund and the university is comfortable, but if they're not com- fortable than it could have nega- tive ramifications. What happened is originally, this was thought of as a no-lose proposition, and I think people now realize that it's got pros and cons. Like anything in life, moderation is best. Certainly a lot of these properties don't pay prop- erty tax, so that's a good thing, but they're paying ground rent. Some of that new car smell has definitely worn off and people are taking a harder look at what on-campus is, and the fact that it does provide benefits, but it also has challenges. Therefore, as part of a good port- folio mix it makes sense, but you don't want to overweight it. SHB: What about the focus on development as the road to growth on the off-campus side? Are ACC and EdR both correct in that assumption? Goldfarb: Development is a lot eas- ier said than done. Certainly we've seen projects that are delivered less than fully occupied, or have cost overruns, or just don't deliver at all, so they're pushed to the next sea- son. They're not unique to student housing, we see it now in multifam- ily and certainly if you look at con- struction costs throughout property types, it's gone up everywhere. The challenge is can you get rent growth to rise commensurately, or how much lower do you accept yields? How do you guard against projects not being delayed? There's been a general appreciation that development is a lot more compli- cated than originally believed, and the risk has definitely increased. Unfortunately the returns, because of how costs have risen faster than rents, are coming down, so it's sort of the wrong dynamic. It's still a good value-add, but should prob- ably be less in overall composition than more just given all the chal- lenges it's had recently. SHB: On the investment front, some would contend that pricing is so frothy that you're taking a risk if you're buying assets at this point in time. Do you agree with that? Goldfarb: One area where the REITs have an advantage is clustering. If you can own not just one or two dorms in a market, but four, five or six, where you can get the effi- ciencies of advertising and person- nel, and other basic costs that now you can spread over a bigger num- ber of properties, that gives you a huge advantage. Development is still part of the game. Acquisitions are part of the game. Pre-sales are part of the game. All these things are part of the game, it's just the fact that the environment has got- ten much more competitive. Look at golf. People are hitting the ball longer, so you have to lengthen the courses. What used to pass for muster years ago as a good shot isn't a good shot anymore. What hasn't changed is the short game. Investing in real estate has gotten a lot more difficult. But just like golf, the short game matters and in real estate, that means that returns mat- ter. If you don't have to throw in all the extras to make a return work, you know you have a good deal. If you underwrite a deal and you have to have all forms of income, all forms of third-party manage- ment, have everything go the right way just to make everything work, it's probably not a good deal. And it means you probably have to say 'no' more than you say 'yes.' It's definitely gotten more competitive, but as we've seen in this environ- ment, prudence can be a very good thing and getting too extended can be a bad thing. That's why the underwriting element is even more crucial today because the margin for error has narrowed. SHB: Do you think the student housing sector will see another public company in the next few years? Or even more than one? Goldfarb: Yes. In the next two to three years I think we will defi- nitely see one. Two may be tough, but I think we will definitely see one. Every time you ask that ques- tion, you probably would still get the same answer but the candidate would change. It's whatever the founder wants to do and the found- ers change, meaning they change their view. One guy says 'yeah, it's something that we're looking at.' The next guy says 'no, we're not doing it,' but another entity is thinking about it. SHB WHERE STUDENT HOUSING POTENTIAL Meets PERFORMANCE A Top 10 Buyer of Student Housing since 2007, Pierce Education Properties is a major national investor and operator of student apartments. Through our acquisitions of core, core plus and value-added assets, we have: • Completed more than $900+ million in acquisitions since 2007, representing approximately 22,000 beds • Targeting $400+ million in acquisitions over the next three years • Developed extensive capital relationships for best-in-class investment capacity and execution Our growing team continues to maximize value through positive investments. We are industry leaders with proven experience, innovation, and success. P i e r c e e d u c a t i o n P r o P e r t i e s . c o m Contact our acquisitions team at 619-297-0400 or email to discuss potential opportunities. INVESTMENT SPOTLIGHT: Smallwood Plaza is a 713-bed, 228-unit community conveniently located just west of Indiana University in Bloomington, IN. $900+ MILLION IN ACQUISITIONS THE SHB INTERVIE W May/June 2018 36

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