Student Housing Market: Opportunity or Bubble? - Virtus
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March 1, 2018

Student Housing Market: Opportunity or Bubble?

Kevin White, Managing Director at Virtus Real Estate Capital, oversees the firm’s alternative multifamily acquisition group, which is responsible for the firm’s student housing strategy.  We sat down with him to get his thoughts on the market.  Want to read more about Virtus Real Estate Capital’s unique take on the student housing market?

Kevin White, Managing Director at Virtus Real Estate Capital, oversees the firm’s alternative multifamily acquisition group, which is responsible for the firm’s student housing strategy.  We sat down with him to get his thoughts on the market.  Want to read more about Virtus Real Estate Capital’s unique take on the student housing market?  Download the whitepaper here.

 

Can you give us your thoughts on the overall real estate market?

Even though we play exclusively in niche asset classes rather than traditional property categories, all of us at Virtus have a pretty good view on the overall market.  Because we’re in multiple property classes, we can see where returns are coming in across the different risk spectrums and in a wide array of property types.

One of the things I think is a common theme across the industry is that there are no blanket “blue light specials.”  There’s no particular sector where we think, “This asset class is completely undervalued.”  Plus, the general assumption is that we’re going to see another two to three interest rate hikes over 2018, so there’s going to be more pressure here, which drives up borrowing costs and is likely to influence real estate valuations.

This can create a real problem.  There’s been a material drop in return expectations, especially in the value-add risk profile.  The returns that investors are now shooting for have come down, even though the risk is arguably the same, or maybe even higher.

That’s one of the benefits to our approach.  Because we’ve been strategic in determining our size, we can be more patient and really hone in on the deals where we have high conviction.  We can still do thoughtful deals where we believe in the fundamentals and play an active role in managing risks and growing NOI.

Read more about Virtus Real Estate Capital’s 2018 Industry Outlook here.

How did you get into private equity real estate?

What really attracted me to private equity real estate is that it’s where bricks, sticks, operations, and finance collide.  Each property you buy is its own business, and that’s very exciting especially in the value add and opportunistic spaces where there is growth potential from driving value to both the property and the business operating it.

We have to figure out: what’s the play, what’s the strategy, how are you going to ensure that you have the right business plan, and the right team to implement it.

Can you give us a little background on the Student Housing Market and why it’s become so hot?

Coming out of the Financial Crisis, people saw how well student housing performed, and became aware of the fact that demand for it is not tied to what’s going on in the overall economy.  In the last few years, we’ve started to see the larger private equity, institutional, and international capital flow in to our space.  This is great in that it institutionalizes our industry, and provides a much deeper buyer pool, but it creates challenges on the acquisition side.

Early on, we were one of the more active student housing buyers, especially on the value-add front.  Now we’ve shifted our strategy to be more development focused, because we feel like development opportunities in today’s market offer a better risk-adjusted return for our investors.

Kevin and his team authored a whitepaper on the headwinds and opportunities in the student housing market.  Read the full piece here.

Going into 2018, what is your outlook on Student Housing and how do you plan to focus your attention?

In addition to high current valuations, the number one risk in student housing is new supply.  Unlike in other property types, one new student housing property in a small market could have a dramatic impact on supply and demand, and ultimately economic occupancy and rent growth of a market, at least in the short to intermediate term.  Everyone’s favorite color is new.

That’s why we erred more on the side of development.  I’d rather be building the new property in the market that has a meaningful competitive advantage in terms of quality or location, than holding an existing project, and having to compete.  This way, if you do hit an issue of too much supply, or the market fundamentals don’t hold up, you can be a market leader if you have the best product.

What keeps you up at night?

Right now it’s my son, who’s six months old.  But from an investment standpoint, really what keeps me up at night, from a more macro perspective, is that it feels like a lot of different property types are priced to perfection.

Markets are getting overbuilt, pricing is staying the same, interest rates are increasing, yet we haven’t seen a meaningful shift in cap rates.

To address this, we’re heavy on research at Virtus.  We’re constantly researching those markets where we think the fundamentals are going to hold up.  We’re challenging our acquisition teams to make sure that not only do we know everything that’s being built in a market, but where all the developable sites are, what’s the likelihood that they get built, and what developers are really focused on these markets.

We never stop researching, because if we feel like the fundamentals are softening, we want to sell before we really see a dramatic impact to the property performance.  It’s all part of our commitment to execute our funds thoughtfully.

Want to hear more from Kevin? Reach out directly here.

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