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Boom In Student Housing Construction Stokes Concerns of Oversupply

Thousands of New Units Slated To Deliver Over The Next Two Years, But Niche-Sector Developers Say New Supply Not Enough for Projected Demand
February 13, 2013
A surge in new student housing projects announced in recent months, combined with lower-than-expected college enrollments, slowed preleasing and rising university tuition has raised a red flag over the compelling demographic case made for years by developers pursuing new student housing projects.

Much of the new development is aimed at meeting the demand for luxury dormitory and student apartment, which attract students with such amenities as stand-up tanning beds, gaming rooms and yoga studios.

In two of the largest projects, Brandywine Realty Trust (NYSE: BDN), Campus Crest Communities, Inc. (NYSE: CCG), and Harrison Street Real Estate Capital last week announced a joint venture for the development of a $158 million, 33-story student residential tower at Brandywine’s Cira South development near Philadelphia; and Crescent Resources has started a 187-unit, 546-bedroom project slated to open in summer 2014 at the University of North Carolina, Charlotte.

Despite the recent developments, developers say demographics will continue to drive an increase in student enrollments and demand for dorms and off-campus housing as new waves of echo boomers head off to college.

"The pent-up demand is so large, even with our conservative estimates. Market saturation is nowhere in sight," said consultant Michael Gallis of Michael Gallis & Associates, speaking at an Investor Day presentation by Campus Crest Communities in December.

That being said, investors and analysts have grown increasingly wary about the potential for oversupply as the market becomes saturated by a steady stream of dwelling units being delivered now through at least 2015.

"We’re very concerned in general about student housing -- a little bit less so in the markets where you can walk across the street and reach the campus, but the amount of student housing supply in this country right now is almost shocking," said Hans Nordby, managing director of Property and Portfolio Research (PPR), a CoStar company. "And the underwritten dollars per bed per year are looking pretty aggressive from what we’re hearing in the market."

Although there’s wide variation in supply and demand between markets, current conditions in student housing feel like the supply bubble days of condominium development in 2005 and dot-com office space in 1999 in manyways, Nordby said.

ACC Chief Executive William Bayless, when asked by an analyst during the company's fourth-quarter earnings call this week whether he felt better or worse about the student housing industry today versus 12 or 24 months ago, responded that he feels better about the industry as a whole and about enrollment, which is steady.

However, Bayless acknowledged that if the question becomes how he feels about new supply versus 24 months ago, he might feel worse.

"There is certainly more supply coming at this point in time than there was 24 months ago," he said.

However, Campus Crest Communities and the consultant Gallis made the business case as recently as December for the need to deliver new supply to meet escalating demand for off-campus housing.

More than three-quarters of the 13.5 million students now enrolled in four-year undergraduate programs at large public institutions live off-campus, creating a supply gap of about 1.5 to 2.15 million beds, according Gallis's research. Meanwhile, public university enrollments will increase as private institution tuitions continue to rise, although again, individual campus markets will vary significantly, Gallis said.

Gallis predicts that by 2022, barring new development, the country would have a shortfall of up to 2.65 million beds. With the student housing REITs delivering about 15,000 beds a year and another two-dozen private developers delivering another 30,000 beds annually, total supply pencils out to about 500,000 new beds, leaving a supply gap of between 1.5 and 2.15 million.

Large trades of existing student housing assets are another sign of the heated market. Three of last year’s largest multifamily investment transactions involved student housing, two of them involving American Campus Communities.

On Nov. 30, ACC closed the acquisition of 19 properties in 12 states from Kayne Anderson Capital Advisors, LP for $862.8 million. The transaction for an aggregate 4,021 units and 12,049 beds included 366 beds under development at an existing property.

Also last year, ACC acquired a 15-property portfolio from Campus Acquisitions for $627 million. In fact, 2012 was the most active year in the company's history in terms of external growth, noted William W. Talbot, ACC executive vice president-investments. Between acquisitions and owned development, ACC added 51 properties with an aggregate of more than 30,000 beds totaling $2.2 billion.

In another big deal, the State of Wisconsin Investment Board and Blue Vista Capital in November acquired the 421-unit, 1,656-bed University Gateway at 3335 S. Figueroa St. near USC in Los Angeles for $204 million, or $123,188 per bed.

The financing market has mirrored the rise in transaction and development volume. Government-sponsored enterprise Fannie Mae provided a total of $33.8 billion in financing to the multifamily market in 2012 -- the third-highest acquisition year in its history -- working with its lender partners to finance nearly 560,000 units of multifamily housing. Of that loan production dollar volume, $712 million was for student housing projects -- relatively minor in the overall multifamily lending picture, but an increase of nearly 50% from 2011.

American Campus Communities, which became the sector's first publicly traded REIT in 2004, has been one of the most active buyers and developers of student housing along with Campus Crest in recent years.
Fourth-quarter-2012 activity in the firm's development pipeline included the following:

  • ACC began construction on The Plaza on University, a $112.3 million mixed-use development project in Orlando, FL. The 1,313-bed project, previously known as University Shoppes, is adjacent to the University of Central Florida and will feature 60,000 square-feet of retail space with four stories of residential units. The project is scheduled to open for occupancy in August 2014.

  • The company executed a predevelopment agreement for a $49 million project at the University of Southern California (USC) Health Sciences campus for 460 beds. The completion date is based on the outcome of the city of Los Angeles entitlement process.

  • Drexel University in Pennsylvania awarded ACC a $168 million project to build a 1,316-bed on-campus development at the corner of 34th Street and Lancaster Avenue. The mixed-use building will include ground floor retail, a dining facility and more than 20,000 square feet of amenity space, with construction starting during the third quarter of 2013 and occupancy expected in fall 2015. In addition, American Campus has signed a letter of intent with Drexel University to convert University Crossings, the company’s off-campus community containing 1,016 beds, into an equity transaction.

Also, large players hoping to diversify their holdings through investment in various types of multifamily have increased their stake in high-end college dormitory assets in recent months.

Toll Brothers, Inc. (NYSE:TOL), which has a core business of developing luxury single-family homes, expanded into the Washington, D.C. condominium market recently and is now eyeing a play in upscale student residential assets.

Oak Brook, IL-based Inland American Communities, a wholly owned subsidiary of Inland American Real Estate Trust, Inc., hopes to double its current 5,000-bed student housing portfolio through the development and acquisition of properties in diversified markets, said Inland American Communities President Travis Roberts.

Inland American announced last week that it has entered into a partnership with an Oregon-based development company and investors on University House Arena District near the University of Oregon in Eugene, OR.

The property, a quarter mile from the University of Oregon’s campus, is slated to open in fall 2013 and will add 244 beds to Inland American Communities' portfolio.

"The partnership with a leading Oregon based developer provided an attractive option for entering this high barrier-to-entry market," Roberts said.

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