Athens, Georgia-based student housing specialist Landmark Properties is seeing a diverse and growing lender pool for the properties in its pipeline, a phenomenon which might seem counterintuitive in today’s market but reflects long-term sentiment on the sector.
Wes Rogers, president and chief executive, said while the firm is not immune to the headwinds stemming from higher rates, there continues to be a wide swath of domestic and international banks willing to fund its projects in the student housing sector.
“We can still achieve attractive development yields on cost in student housing, so we have a good group of investors who are willing to continue to move forward,” Rogers added.
According to Rogers, Landmark Properties tends to borrow almost exclusively on the construction side from banks such as JPMorgan, Wells Fargo and other international banks. He revealed that Landmark Properties also has two most active equity partners: one is a subsidiary of a Canadian Life Insurance Company, and the other one is a Middle Eastern sovereign wealth fund.
Rogers said that banks did turn more cautious about lending on real estate construction and become more sensitive to leverage, but the firm benefits from deep relationships with lenders who understand its strategy. Debt funds, while active, offer a higher cost of capital and life insurers are also active in the market when banks are available.
“Fortunately for us, most of our development is done in lower-leverage and longer-term buckets of capital, so we’re not quite as sensitive to leverage as a lot of other groups out there,” he added.
Rogers believes the strong operational performance of student housing is “somewhat a bright spot in the overall gloomy real estate world.” The company’s business has been centered around developing, managing and investing in student housing properties around the nation and benefited from the sector’s rent growth potential and less susceptible market cycles.
“We’ve been focused until the last couple of years exclusively on student housing,” Rogers said. “We have diversified a little bit into single-family built-to-rent and traditional multifamily development, but if you look at our portfolio, we’ve got about $12 billion dollars of assets, and about 95 percent of those assets are student housing.”
Rogers said in the current market environment, deals in traditional multifamily and single-family built-to-rent are harder to pencil. “You’ve seen rents pretty much flatline on multifamily. At the same time, construction costs continue to be elevated, and then with rising interest rates and cap rates subsequently going up, the math just doesn’t really pencil,” he said.
In contrast, the student housing sector showed greater resilience against commercial real estate headwinds and produced more stable income for asset managers.
“Operationally, student housing has never performed better. We own and operate nearly 66,000 beds across the country, and we’re experiencing occupancy right at 98 percent in our portfolio,” Rogers said. “We saw nearly 10 percent rent growth in our portfolio year over year,” he added.
The bifurcation within the student housing sector
Diving deeper into the student housing market, Rogers said a bifurcation between properties near top-tier, flagship universities and smaller, tertiary universities cannot be ignored.
Usually at public state institutions or strong brand-name private universities, the demand for student housing continues to grow as enrollment grows coming out of the pandemic. In comparison, “some of the small for-profit, tertiary universities, they’re not offering a compelling value proposition or having enrollment challenges in the face of some big-picture demographic issues,” Rogers said.
Having said that, the overall performance of the student housing sector surpasses traditional multifamily properties. He added that one of the fundamental reasons behind the growth divergence between student housing and multifamily is customers’ willingness to pay.
“I do think it is important to note [that] our residents tend to be less price-sensitive, so our demand is more inelastic typically than multifamily is going to be,” Rogers said, adding student housing renters usually have more levers to pull for accessing capital for their rent, either student loans or parents’ savings.
Looking ahead, Rogers believes as real estate is a more interest rate-sensitive sector of the economy, it is probably going to feel a disproportionate amount of pain in the coming months.
“I’ve been saying since early this year that I think this is going to be probably a little longer and a little more painful than most people in real estate have come to expect,” he said.
However, the company still holds a bullish vision of almost exclusively operating student housing properties. “We fully expect to be able to capitalize and start three very large projects despite what’s going on [in the] big picture,” Rogers said.
Landmark Properties has started a $170 million project recently and is planning to put about $1.5 billion in new construction of student housing this year.
In addition, Rogers also noted that student housing has transformed in the past decades from a niche asset class to a more mainstream sector that attracts institutional investors, many of whom are international lenders as well.
“Historically, student housing has kind of been seen as a subset of multifamily, but I think just given how well student housing performed during the GFC, and then during COVID, and then today, I think smart institutional investors are really attracted to the space because it’s less volatile,” he added.
He continued, “If you looked at student housing 10 years ago, there were pretty much as many private equity firms that were in the space, and forward to today, you have the world’s largest real estate investors and the world’s largest sovereign wealth funds actively investing in the space and telling us that they’re getting some of their best risk-adjusted returns globally in student housing.”