Wall Street poured billions into campus housing — thinking it was an easy win. With colleges sitting empty, here are the bets that could get hit the hardest.
Investors have poured billions into student housing, and now the sector's undergoing its first real test. Student housing providers' performance will largely come down to whether they're focused near small or for-profit schools that could collapse, or near state schools and top-tier universities that will continue to see strong enrollment. The sector's short-term outlook is bumpy, but analysts and executives said they're still optimistic about the medium and long term. For more BI Prime stories, click here.
Avi Lewittes knows the pain college students – and their parents – feel as laptops on kitchen counters replace lecture halls. "As a parent of college students who are attending college from their childhood bedrooms, online learning is clearly not a compelling value proposition," said Lewittes, the father of three young adults. And as chief investment officer of Scion Group, one of the country's biggest student-housing providers, Lewittes has been evaluating the impact of sudden school closures and uncertainty about fall reopening not just on his kids, but across his company's 28-state portfolio of housing for nearly 60,000 students. Chicago-based Scion and its peers have poured billions of dollars into student housing in recent years from public-markets investors and private groups like pension systems and sovereign wealth funds. Investors have sought out the sector in part because when the economy goes south, enrollment typically shoots up, making student housing a better bet in a down market than other real-estate options like retail. The bigger student-housing companies often partner with well-known universities, helping to guarantee income. Now, after the coronavirus pandemic emptied college classrooms, the sector is facing its biggest challenge yet. While early predictions from five executives and analysts are rosy, the 2020 outlook hinges on an open question: Can students safely return to campus in the fall, and, in case of a second wave of the coronavirus, stay there? One Yale student told Business Insider earlier this month that all of her close friends are weighing taking the fall semester or the full year off. So far, pre-leasing numbers look better than expected, but the demand dynamic is complicated. Some international students, who can often afford nicer housing, may not return for the fall – but US students can't do their study abroad programs, so they'll need housing. Facing a more difficult financial situation, some parents may not want to pay up for buildings filled with amenities, from hair salons to SoulCycle, while others may want to pay any price to get students out of packed dorms. And the most important question – whether or not schools will be admitting students in the fall – is still open, with most schools promising an answer by the end of June. 'We've never been put to the test' Most of the big student housing companies don't invest much, if at all, in traditional dorms, where students are packed two or more to a room and share a bathroom with dozens on their floor – a potential recipe for disaster during a pandemic. Instead, the companies have largely focused on on-campus housing with en-suite bathrooms and off-campus housing. The latter is more similar to an apartment building than a dorm, with some properties offering high-end amenities like golf simulators and pools that are geared toward students with affluent parents to guarantee rent. Many students have stayed in those apartment properties during the pandemic, which could help the buildings stay occupied even as some schools go online for the fall. "As the sector has continued to institutionalize, investors have been attracted to student housing as an economically resilient space. We like talking about it, but the sector has never been put to the test in this way" Lewittes said. Broadly, the higher education space is under extreme stress, with some schools that could collapse under the sudden economic pressures of no revenue from students and no other income from other areas like sports and medicine, as Business Insider reported earlier this month.
If a school goes under, the student housing provider would not be far behind, so university choice is the most critical characteristic to understand if a company will survive or fail. But the big student housing companies tend to focus on top state schools, many of which have been geographically insulated from the pandemic and could see enrollment increase as students seek lower-cost options, and on first-rate private schools, like the University of Chicago. Neither type of school is in immediate danger of going under. More than 70% of the schools that Scion works with said they plan to reopen in the fall, and only 140 of the company's leases were canceled in March and April, which were outweighed by 330 new leases signed in the same two months for students who needed a new place to live immediately. 'A bumpy three to six months' Nick Joseph, a senior research analyst at Citigroup, said he's primarily focused on schools' announcements about fall plans, and then he evaluates preleasing and current rent payments. "The question is what will happen in the fall," Joseph said, noting he's still optimistic about the sector's medium- and long-term prospects at well-established schools. Scion collected nearly 98% of April rent, and its largely off-campus portfolio has stayed almost 80% occupied. And as of May 12, the company's portfolio was 72% leased for the upcoming academic year. The only publicly-traded company in the space, American Campus Communities, collected about 93% of April rent across its 600,000 beds, and as of April 17, its portfolio was 76.6% leased for the upcoming year – just ahead of preleasing numbers for the last year. John Pawlowski, the residential sector head at Green Street Advisors, said that, nationally, student housing occupancy usually hovers just above 90%. This fall, that could drop to just under 70%, as some schools, like the California state university system, opt for online-only classes. Many schools have not yet said if they'll reopen, as usual, go online-only, or take a hybrid approach, with small classes meeting in person and lectures online. That lack of clarity is giving the sector a "near-term headache," Pawlowski said. "We don't think student housing operators are completely out of the woods," he said. "Student housing has not been a shelter from the economic storm within real estate ... The recession-resistant label will still apply, but it could be a bumpy three to six months if a lot of universities try to restrict bodies on campus as much as possible. It's not a good thing for near-term occupancy." Student housing companies could see an uptick in leasing from schools that need to quickly rethink traditional dorms, as students and their parents fear sharing a bathroom with an entire floor. American Campus Communities' CEO Bill Bayless told Business Insider the schools the REIT works with have about 40% of their housing in these traditional dorms. Some of those schools are discussing turning multi-student rooms into singles to de-densify the floors, a win for on- and off-campus student housing providers that could see an influx of students. Schools are also setting aside entire buildings for quarantine space. Lewittes said Scion has had multiple talks with universities looking for properties with more than 250 bedrooms. "It's shined an interesting spotlight on how the high degree of density traditionally associated with on-campus living is not well-suited to unforeseen health risks like a pandemic," Lewittes said. "This may change the traditional perception that on-campus housing represents a relatively safer or more secure investment than purpose-built off-campus student housing, which typically includes residential units with single-occupancy bedrooms and private bathrooms." In the longer term, the changes in design and resident preferences stemming from the pandemic could mean more on-campus work for firms like ACC, if schools can sustain the funding for upgrades. The REIT has spent $5.5 billion to modernize schools' older dorms, most of which were built more than 50 years ago. "With the pandemic and the challenge that that older product type is posing, we think post-COVID-19, we'll see an increase in the pace that universities are modernizing," Bayless said. 'Running our full offense' Lewittes, Scion's CIO, said there could be buying opportunities in coming months from smaller operators facing distress and from real estate owners selling student housing assets to make up for losses in other property types hit harder by the pandemic, like retail. But he doesn't expect to see prices go down much for high-quality assets in top-tier markets. "It's expensive and labor-intensive to operate student housing. If you don't have scale, you're likely under pressure at the best of times," Lewittes said. Chris Merrill, the CEO of Chicago-based private-equity real estate firm Harrison Street, said he's ready to do deals. His firm closed its seventh fund last August, raising $1.6 billion for student housing and other alternative property types like senior housing and storage. "We have spent $1.5 billion this year and are running our full offense," he said. "We've closed on a lot of deals over the past few weeks even during this period and continue to see attractive properties to buy. My view is that managers for whom student housing is not a core focus will be less active in the space, which will present more opportunities for us." Harrison Street, like some other firms in the space, often works with colleges including the University of South Florida in public-private partnerships to build student housing, along with supporting projects like grocery stores and wastewater treatment plants. As schools face increased budgetary pressures in coming years, such partnerships will only increase, Merrill said. "Many schools will likely struggle with the aftereffects of the pandemic and reduced state funding and we are ready to help them fill holes and gaps in their funding," he said. Jason Schwartz, who leads student housing for private equity real-estate firm Blue Vista, said he expects a significant dropoff in the sector's transactions in the second and third quarters. Once investors have more clarity in coming months, he said deals will pick back up in the fourth quarter. "Uncertainty is rarely a friend to transaction activity. If you're a seller, why would you sell an asset until there's more certainty?" he said. "Over the last few months, we've been both buyers and sellers. In both cases, whether we were buyer or seller, we've come to an agreement with the other party to delay." SEE ALSO: College students don't want to return in the fall, and it could cause many universities to collapse SEE ALSO: Blackstone bet big on 4 huge Las Vegas casinos. Then the coronavirus brought Sin City to a halt, right as the PE giant was trying to unload one of its multi-billion-dollar jewels. 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