Value-Add Strategy Proving More Profitable Than Ground-Up Development In Student Housing

Value-add is often more profitable than building new, panelists at Bisnow's Annual Student Housing Summit said Tuesday. Opportunities to pick up an older building in the right area, however, are hard to come by. Pictured, from left, panel members included Heidi Henderson, Will Baker, Shawn Sweeney, Gary Holloway, Avi Lewittes and Isaac Sitt.

“I don’t think there are as many value-add opportunities as there are ground-up opportunities,” Shawn Sweeney of TSB Capital Advisors said. “There’s not a lot of ‘70s or ‘80s product out there with bed-bath parity that’s a half mile to campus.”

When these rare opportunities do arise, they can be extremely profitable because they compete with new ground-up construction for a significantly smaller cost. Vesper Holdings’ Isaac Sitt said it’s costing public REITs about $90k/bed to build new product, where they’ll charge $800 to $1k/month in rent. Value-add product, on the other hand, costs $55k to $60k/bed to purchase and renovate and will fetch rents of $500 to $700 per month.

The finished product—a 10-year-old property in like-new condition with extensive amenities but a few hundred dollars less than new construction—offers compelling value to the end user. Isaac said the vast majority of students at these four-year schools can afford to live in these properties, but only a small percentage can afford the steep rates demanded by pricey ground-up projects.

Ground-up projects present other hurdles as well. Isaac discussed the disadvantage of “having to ‘put our money to sleep’ for a bit while we’re buying the land, getting it zoned properly, and going through the construction process” and mentioned the stress of meeting hard deadlines with the school year rapidly approaching.

Walker & Dunlop's Will Baker added that, contrary to traditional multifamily projects, ground-up construction in the student housing niche is subject to a singular lease start date that, if missed, could mean putting kids up in hotels or suffering from occupancy rates of 60% to 70% during the project’s first year. A late delivery is not an option in student housing construction.

The school calendar-oriented leasing cycle also dictates financing trends. “It’s been a very, very active year in student housing,” Will said. “It’s always even more active come September once we get the fall lease-ups because that’s when we usually get an influx of requests coming in to underwrite that high fall income.”

Avi Lewittes of Scion Group took a different stance, citing a combination of value-add and ground-up projects as Scion’s strategy. “I think we’ll continue to look for opportunities in the markets we target to be able to both reposition older product and continue to acquire newly delivered communities to be able to maintain product and price point diversity,” he said.

Recent regulatory changes have affected the ease of student housing development, GMH Capital Partners' Gary Holloway told the audience, but he thinks cracking down on high volatility commercial real estste loans will ultimately have a positive effect on the market. “Only the experienced developers will be able to get loans and only the best projects will be able to get off the ground,” he said.

Will says loan terms are helping to make this year a great one for student housing. “The 10-year Treasury bills have dropped below 1.6%, which is incredible. You can get 10-year fixed-rate financing for a little under 4%. The terms are very attractive right now,” he said.

The panelists agreed at the close of their discussion that for their own children, they valued peer interaction made possible by on-campus housing’s close quarters over elaborate amenities and even cost.