Can You Avoid Oversupply Concerns at Smaller Schools?
While well-heeled student developers flock to the larger schools, some developers have found success off the beaten path—but that’s not to say it’s easy.
For a long time, student housing was overlooked by institutional investors as an asset class, but the big money is now comfortable investing in the largest student housing developers that have been gobbling up land at the big state schools.
“The big developers’ capital sources don’t want to be at the second-tier schools,” says Brent Little, President, Fountain Residential Partners. “To meet their investment criteria, they need to be at schools with 30,000 students or more and it has to be a research institution.”
If you are a smaller developer who wants to build at those large schools, you’re are probably not going to find a well-located piece of dirt that makes a lot of sense, according to Alex O'Brien, President of Cardinal Group Companies
“In student housing, there are a handful of well-capitalized national developers,” O’Brien says. “The smaller guys will not beat these guys. Their money is too cheap and they can outbid anyone on land."
So, what do you do if you’re a smaller student developer? While you won’t compete at the big schools, there are still a lot of opportunities if you know where to look.
Little casts a deep net, evaluating development opportunities at nearly 300 schools nationally. “As a medium-sized builder, we can always find good targets on a national basis,” Little says. “You can go to smaller schools, deploy capital and be successful.”
But there are pitfalls. Little says many developers try to bring their big-school model to smaller institutions, and it can fail. “Many companies are doing 900 to 1,000 beds at smaller schools and they are struggling to fill the last 300 beds,” Little says.
Instead, Little would rather build two 400-bed deals than one 800-bed project.
“We are doing 174 beds in Chico, Calif.,” Little says. “We can do that size deal, do it well and make a nice little profit. We don’t have to do 700 beds in a small market. We can find plenty of markets to do 200 to 400 beds a year and do them well.”
Even if a developer is planning to start smaller projects, O’Brien says they need to tread carefully. “At smaller schools, you have to be a lot smarter. You have to do more research on the students. Enrollment is unpredictable. The big deals at the big school will always be safer. Enrollment at Texas A&M is not going anywhere. The school is oversupplied right now, but the supply will be absorbed and the market will bounce back.”
The University of Louisiana at Lafayette is not a large school in the Southeastern Conference. But Miles Orth, EVP and COO at Campus Apartments, says the university is plagued by a combination of supply and demand issues.
“There are some new off-campus apartments and some new on-campus apartments that we are planning to compete against,” Orth says.
It’s obvious that if a student developer doesn’t do their market research, regardless of the size of the school, they are going to face issues filling beds.
“I’ve seen head-scratchers where guys think they are being clever by going to small markets, but they are getting beat up,” O’Brien says. “What do you call a good deal in a bad market? A bad deal.”