New Home Insights Podcast Episode 68 Transcript | John Burns Real Estate Consulting

Episode 68: The Student Housing Sector Proves Its Resilience

 

Transcript

Dean Wehrli:

Welcome to New Home Insights. The podcast by the John Burns Real Estate Consulting company about the US housing market. I’m your host Dean Wehrli. Student housing has long been kind of chronically under supplied. When COVID 19 hit the student housing market was hit pretty hard by folks going home, but it seems like it’s one of those parts of the housing sectors that has long been kind of underappreciated. It’s a key part of the residential world here in the United States. So here at New Home Insights, we want to do our part to fix that and to appreciate it. To help us do that, we have Fred Pierce, he’s the president and CEO of Pierce Education Properties. They’re a major developer and manager of student housing with a national footprint. Fred, I think you have about 30 years of experience in the student housing sector. So how are you doing this morning?

Fred Pierce:

I’m doing absolutely fantastic. Thank you for having me.

Dean Wehrli:

Thanks a lot for coming on. So let’s just start with a real brief, tell us about your company, what you do, and then we’ll get right into it.

Fred Pierce:

Pierce Education Properties was founded 27 years ago, really at the precipice of the founding of the student housing industry. We started for 10 years as the master developer of a multimillion square foot, multibillion dollar redevelopment project of 131 acres surrounding San Diego State university, one of California’s largest public universities. In 2006, we went national and we broadened what we do from development into acquisition in a big way. Since then, we’ve acquired over 1.1 billion dollars worth of purpose-built student apartments, about 30,000 beds at more than 30 universities across the country. We’ve become a major player in the business of student housing, ownership operation and development.

Dean Wehrli:

I looked at your map on your website and it’s all over the country. You have a very diverse footprint.

Fred Pierce:

We go to public universities with 20,000 undergraduate students or more, or 25,000 total students or more, that are at Division 1 football universities that play in the Power Five conferences, or they can be in the group of five conferences if they’re in a major Metro area. So a very refined strategy.

Dean Wehrli:

The PAC 12 is getting decimated as we speak. So we might have to redefine that, sadly. I’m from UCLA. So it’s okay for me, but I feel bad for Oregon State and those guys.

Fred Pierce:

What I can tell you is the PAC 12 needs San Diego State. That’s what they need.

Dean Wehrli:

All right.

Fred Pierce:

Retake back Southern California.

Dean Wehrli:

Good, sage advice. So let’s get right into it. Give us an outline of what happened to student housing when COVID 19 broke out.

Fred Pierce:

It’s really an interesting question. To some of your comments, really misunderstood nationwide. So as you might recall, in the spring of 2020 is when the pandemic was declared. March 2020, they shut down the NCAA basketball tournament and almost immediately thereafter, virtually every university in America converted to being completely online. As soon as they pivoted to being online, they sent all the students home. That was all the students living on campus. So then the question became, what about all those students off campus? What did they do and what happened? We surveyed our students, because we are completely off campus. In April, we had found that 40% of our students had gone home. They were still paying their rent, but they had gone home. Then in May we surveyed again and 31% were still at home. So nine percent went home in April and came back in May. They were already tired of being at home.

Dean Wehrli:

Who was it? Was it them or was it their parents? Maybe a little of both.

Fred Pierce:

It was both. For sure. I had the president at university of Florida, asked a kid who’d come back and he says, the classes are all online. Why are you back at school? He says, I’m tired of my mom telling me every day to make my bed.

Dean Wehrli:

Okay. Wow. Well that’s Florida.

Fred Pierce:

Yeah. Now let’s pivot. So then now go into the fall of 2020, and it was all over the map in the summer as to schools saying, we’re going to be back in person and others saying, we’re going to the Cal State and CSU. CSU and UC said, we’re going to be completely online. It was waffle and all over the place. At the end of the day, the majority of universities ended up being hybrid, but surprisingly occupancies off campus were only down three percent. Students mostly showed up and they definitely paid their rents. We were collecting 99% of our rent in academic year, 2020, 21. So we had parental guarantees, backing individual student leases. The parents didn’t want their credit impacted. They didn’t want their kids credit impacted and progressively through the fall, even more students came back. Then when you fast forwarded into fall 2021 and into 22, occupancies were back up and now for this coming fall, pre-leasing as of the end of July, was up 10% over the pandemic and five percent over the previous year. It’s going to be a robust year for student housing.

Dean Wehrli:

So do you mean that student housing has regained and then some it’s population pre-COVID?

Fred Pierce:

That’s correct. As a matter of fact, it looks… Not every market is robust. It’s really the haves and the have not’s in higher education. You’ve got places that are bursting at the seams with applications and enrollment. You’ve got some other places that tier two and tier three universities, who are struggling to keep enrollment, right? It’s not the same game everywhere, but nationwide it looks like the entire more than one million beds of student housing’s going to be 95% plus occupied, this year.

Dean Wehrli:

What’s the differentiator then between those haves and haves not’s? Is there are a couple of key variables that define that?

Fred Pierce:

There absolutely are. Number one, two and three are selectivity. The most selective universities, frankly, the most in demand universities are still bursting at the seams and then universities, who are not so much in demand, maybe they’re more region serving. If their region has declining K12 enrollments, picture, frankly, parts of the Northeast or the Midwest where there’s declining high school enrollments, as opposed to the Sunbelt or California or Florida or Texas, where enrollments in high school are booming and so our college enrollments. The other thing, our strategy of Division 1, when you are at a Power Five football conference university, applications are still off the chart at most of those universities. Everyone’s heard of them and they want to go there.

Dean Wehrli:

Except for Florida. I’m kidding. I pick on Florida a lot in the show here. Is that fair to say then, the biggest demand markets from a national perspective, are those kinds of smile or Sunbelt states that you find a lot of just general housing market to be where the most demand is? Is that true for student housing as well?

Fred Pierce:

So at a 30,000-foot level, yes, that’s definitely true, but at the same point in time, Ohio State, and Michigan and places like that, Wisconsin, that are just really prominent, really well known, they got tons of kids that still want to go there.

Dean Wehrli:

Okay. Is that, because those kind of land grant universities, Michigan’s a classic one, where there’s not a whole lot to do in Ann Arbor or there’s not a huge population base and therefore a huge number of households, those kind of isolate is not the right word, but you know what I mean? Those kinds of college campuses just have to almost have a lot of student housing. Does that make sense?

Fred Pierce:

Well, so they have a lot of students and that’s where it starts. It’s sort of like demographics in the retail business that you need a population ready to spend. We need a lot of kids attending the college and yes, the land grant universities, where back in the day, the state’s granted really large allocations of land to those universities. They’re still land rich. Certainly those have become amongst America’s most prominent universities, but they can be in urban areas. I mean, interesting that you mentioned Ann Arbor, because Ann Arbor’s really a suburb of Detroit, where there’s a really big population, but the land grant on the other hand in Michigan, is Michigan state up in East Lansing, which is an hour and a half outside of the big metro area. So yeah, those definitely are part of America’s prominent universities.

Dean Wehrli:

I was just thinking that, because they say University of Washington right there in the middle of Seattle, there’s lots of options that aren’t student housing versus a Michigan State and East Lansing, where it’s a much smaller population based. There are fewer options for students, I guess if that makes sense?

Fred Pierce:

Well, yeah. In fact, those are good examples. So University of Washington in a major Metro area, but historically there’s been a higher and better use than student housing and what students can pay for rent. So for-sale sale condos would’ve been a higher and better use in some of those major Metro areas historically. So it’s actually made the inventory of student housing more finite in most of those areas, because somebody has built something else. You’ll find in major metro areas, New York and Boston and Chicago, it’s tough to find student housing, because there’s just not enough of it that’s been built. Whereas if you’re in a more Greenfield kind of an area that people have been able to deliver more supply, it still means that there’s really strong markets even in college towns, but it’s really tough in major metro areas.

Dean Wehrli:

Okay. How do you measure demand? Do you formally quantifiably measure demand? And if so, what are the kind of key inputs for that?

Fred Pierce:

Yeah, that’s a really good question. Of many interviews I’ve done, I don’t think I’ve had that question.

Dean Wehrli:

That’s what we do here.

Fred Pierce:

Hey, there you go. It starts with student enrollment and you need a large student enrollment. So by way of example, we don’t go to private universities. Most of them are less than 10,000 students and most of them house the majority of their students in on campus housing that the university owns. So if Yale says you are admitted, but you got to live in my housing, what chance do I have off campus? It’s the same deal at Notre Dame or you name it, at some of those prominent private universities. So it starts with the size of the enrollment.

It’s more important that it’s undergraduate students, because most undergraduate students, especially living in the nicer, highly amenitized, more expensive student housing, their parents are paying for their higher education. You want strong demographics. That’s a strong demographic, whereas graduate students, they’re poor. Their parents aren’t paying for their graduate degrees and they’re taking out student loans and they also don’t want to live in a four bedroom, four bath with a whole bunch of undergraduates for that, excuse me, for that matter, they don’t want to live with a whole bunch of graduate students. They want to live in a studio or a one or maybe a two bedroom and maybe with one other person, it’s probably their girlfriend, boyfriend or spouse.

Dean Wehrli:

Or spouse, yeah.

Fred Pierce:

In graduate school. So we look to strong undergraduate populations, good demographics and also international students are really strong tenant base for student housing as well. So the demand is measured there and looking at international students and undergraduate students primarily.

Dean Wehrli:

Okay. I did read something somewhere, I forget the source, but that said that actually grad student demand is increasing. Maybe it’s a small part, but is it actually starting to perk up?

Fred Pierce:

What is increasing is graduate student enrollment and in particular, it’s countercyclical, because if you picture when the economy goes into recession, then graduating seniors sometimes can’t get a job. They just continue right on into graduate school or others in the workforce seek retraining. They decide, I just got laid off for my job. Maybe I retrain and I do that. So they’re back in graduate school. Of course, a graduate degree is more valuable today than it was 25 years ago. More employers are demanding it. So you definitely see more demand for it as well as international students, a big chunk of the international enrollments. There’s a million kids from foreign countries, studying higher education in America.

Dean Wehrli:

Thank you for your dollars. Those guys are cash cows. I’m not going to lie. At major universities, those folks are huge profit centers.

Fred Pierce:

Because if you could study abroad from a foreign country, you’re probably from a wealthy family.

Dean Wehrli:

Yeah, and they charge it like they assume you are… What is the main competition? Beyond on campus student housing, what is the main competition for your off campus student housing? Just regular apartments or even individual rooms in homes?

Fred Pierce:

Well, so there is sort of a living lifecycle of a college student and most folks that are out there, can think of what they did or maybe what their kids are doing. So they live on campus as freshmen and then they get sick and tired of the university’s rules and they want to live on their own without the same set of rules you have in the dorm. Who can be at your place, what you could drink, what have you. They move off campus and their first choice is purpose built student housing and nowadays where they can rent it by the bedroom and they get their own bathroom and their parent guarantees their lease, but only their lease and not their roommates. So you’re at a four bedroom apartment and your parents only guaranteeing your one bedroom lease. Even if it’s the most expensive, it’s reasonably affordable and likely less expensive than what it costs you to live on campus.

So most all purpose built student housing will range between 500 and a 1,000 dollars a month. Most of it, that’s 95% of the housing in the country for a 12 month lease. So they move there and then those students stay in purpose built student housing for one to two years. They have a great time. The operators are prudent and wanting to help students matriculate towards graduation. So we let the students have a good time, but not too good of a time. No. So we monitor what’s going on. If things are too loud or parties are too big, we close them down, but we let them have a good time.

Then students often, for their senior year, move into a house and they move in with friends and they get a little bit more quiet in that house than maybe in a big complex with 500 or 800 other students there. They’re focused on getting their degree and get getting out of school. Generally speaking, the conventional apartments are less expensive, but they’re older and they’re not highly amenitized if they’re right near the university. You don’t see many of those with a swimming pool or a lazy river, but in purpose built student housing, you do, and a sand volleyball court, a tanning machine, and a basketball court. You get all the amenities and you pay a little bit more for it, but it’s worth it.

Dean Wehrli:

With the aging demographic of the United States and more empty nesters out there, are you finding more competition from literally individually rented rooms in houses, near campuses?

Fred Pierce:

Not so much. Only in that, those houses have been there generally speaking for a very long time. If they’re close to a big university, that neighborhood’s been there, there’s not new subdivisions being built, there’s not a lot of land around these big universities. So it’s the same inventory that’s been there. So no, we don’t see it. We see stable competition from those. It’s the same inventory. The only place it changes a little is when they convert them to mini dorms and they take a four bedroom and now they cramp eight people in there. That can change the landscape, but most cities are passing ordinances that are limiting or precluding that only a certain number of unrelated adults can live in a house or you’re in violation of the city ordinance.

Dean Wehrli:

Yeah, that’s pretty common. I was just going to say that. If that became a big thing near campus, I think that city would shut it down pretty quickly.

Fred Pierce:

They are, but enforcement is cities only have so many resources. If you get a whole bunch of many dorm Lords that are out there, takes city resources to follow up on.

Dean Wehrli:

It does. Is new student housing being developed mostly right now? Is it the university’s themselves building their own owned on campus housing? Is it more like what you doing?What’s kind of the development these last recent times in going forward?

Fred Pierce:

It’s both and the situation is this, that on many universities, the on campus housing inventory is very dated. Maybe it was built in the 60s or the 70s and these mid-rise dormitories and the product type is dated. The finishes are dated, the amenities aren’t state of the art and right after selecting the university, based upon its academic offerings and its academic quality and reputation, the second most important factor for an incoming student, is housing. So to be competitive, universities on campus want to need newer housing. So more and more are demolishing their older housing and replacing it with new housing, so they can keep up with the Joneses, so they can compete against their peer universities that they compete with for admissions and applications. Then at the same point in time, there is demand for off campus housing and there continues to be demand for off campus housing and that’s university by university.

It’s based upon their enrollment dynamics, their applications, but the same deal, the kids of a generation ago, they lived at home in high school and maybe they shared a bedroom with their sibling. Now today’s high school kids probably have their own bedroom with their own bathroom. When they go off to college, they don’t want to share a room. They get forced to do it as a freshman. When they move off campus, they want their own bedroom and that’s what the new housing’s delivering to them. So there’s a lot of demand to build new housing off campus.

Dean Wehrli:

Let’s shift over to product. You just mentioned that a minute ago. That’s a good segue. In terms of student housing, it’s like you’ve said so this entire time, it’s beds, you’re thinking about bed count. What is the hot thing? Is it four rooms with two in each? So eight total students in that thing? Or is it more, are people moving away from that maybe, because of COVID and more single beds per room? What is kind of the trend right now for product?

Fred Pierce:

So the fact is, there’s been a lot of questioning out there as to, did COVID and social distancing and what we learned and what’s going on with maybe university housing by way of example, is that changing off campus, new development? By and large, it’s not. Part of that is, college students didn’t get sick. I mean, out of 18,000 beds that we operated nationwide at the beginning of COVID, we had less than 30 reported positive code cases of COVID. Less than 30 out of 18,000 and to our knowledge, only one of those had to go to the hospital. She got pneumonia. Then she recovered and everybody recovered. So number one is, college students really didn’t get very sick. Number two is, the off-campus inventory was almost entirely bed-to-bath parity. So they already had their own bedroom with their own bathroom. It was almost as if it was designed for social distancing, as best as you can in a housing environment.

The only place that’s changing is that there is a trend in the last 10 to 15 years of building properties that are more pedestrian to the university. In order to get them to be pedestrian, the land is so scarce, they have to go vertical. So their mid rise and high rise structures. In that situation, square footage is at a premium. So the housing in those buildings is getting smaller. Maybe they’re not all bed-to-bath parity, because they don’t want to build four bedroom, four bath, maybe they’re building four bedroom, two bath. In some instances there’s more one’s and two’s in there. Again, because of the footprint of the building itself. You’re not out in a Greenfield where you can spread out garden style buildings and you can build more square footage. So it’s the constraints that are impacting it, more than it is COVID per se. It’s what’s going on in really urban situations.

Dean Wehrli:

So you’re seeing more of that mid rise, even high rise type, dense configurations. Are you seeing that in just urban areas? Or are you even seeing that in, and again, some of those land grant university locales?

Fred Pierce:

You are in both, because even in land grant or more land rich universities, for first of all, the private housing is happening off campus. So the university’s deciding how much it wants to have on campus. It’s not ground leasing land for private apartments. It’s largely building freshmen, occasionally sophomore housing that is programmed for that purpose. So still, the land available for new development, even around historical land grant or in college towns, is in finite supply as well. Just picture the university you might have been if you’ve been in East Lansing or cities like that, the land around the university is built with something. Maybe it’s one story, old beat up retail spaces or single-family houses or what have you, but there’s not a lot of vacant land. Where they do find it adjacent to that, they had a block right out at the front door to Iowa State University in Ames. It’s all mid rise, because they redeveloped and rezoned the area right there on the front doorstep to the university.

Dean Wehrli:

My guess, those are the only residential mid rises in Ames. Am I right? That’s got it.

Fred Pierce:

Yeah, that’s correct.

Dean Wehrli:

I would guess. Is there a sweet spot for how big a student housing development should be? I mean, are you trying to go big or there’s almost like boutique-type student housing development?

Fred Pierce:

So there’s both, but frankly there is too big, because in student housing, unlike conventional apartments where every month somebody’s moving out and somebody’s moving in and the inventory sort of just steadily turns over, in student housing, we move everybody out, generally speaking on July 31st and we move them all in on August 15th and we lease all year to have them move in one time a year. So there’s definitely a different dynamic in student housing as compared to conventional housing.

Dean Wehrli:

Yeah. Let’s kind of shift over a little bit to development. Actually, this next question is a little bit of a hybrid between product and development. Are cost to build, let’s say on a per unit basis student housing, are those similar to a normal apartment complex? Are there a different kind of a cost structure for student housing?

Fred Pierce:

What I would say is, as compared to apartments, it’s a little bit more expensive, because of the typical bed-to-bath parity. You might find two bedroom, one bath apartments, but in student housing you want one, one, two, two, three, three, four, four. So you’ll get more fixtures and more bathrooms in student housing. Then on a per unit basis, it can get a little confusing, because almost all conventional apartments are only studios, ones or twos. Whereas, I’m building four bedroom, four bath at San Diego State in mid rise buildings and they’re costing between $850- and $900,000 a unit. At first, people are looking at it going, oh my goodness. Then we say, no, but what is that per bedroom? Compare per bedroom to what the conventional apartment is per bedroom and in that case, we’re still in the ballpark. We’re charging rents per bedroom. So it’s really relevant what our cost is per bedroom, not necessarily per unit.

Dean Wehrli:

So it’s modestly more that it would be to build a similar size apartment complex?

Fred Pierce:

I think that’s correct. Yeah. Modestly more.

Dean Wehrli:

Okay. How about in the development world, the availability of capital for student housing? Is it a hot investment kind of a market or has things recovered from COVID again?

Fred Pierce:

Yeah. So on COVID, like everything in commercial real estate, but certainly in student housing, the second and third quarters of 2020, everything just froze up, because nobody knew what was going to happen with higher education, what impact it was going to have. Once it was determined that the kids came back to school and the housing was all occupied and they were all paying their rent, matter of fact, collections in student housing were three to five percent higher, than they were in conventional housing. Because you could picture maybe more people lost their jobs, that were renting apartments and they took advantage of COVID eviction moratoriums and what have you, whereas the kids, their rent was being paid by their parents and they had a guarantee on it and they’d already saved up for their kids’ college education and they weren’t going to abort that. So they kept paying. We had way better collections than during COVID.

Dean Wehrli:

But is it easy now? I shouldn’t say easy, maybe is not the right word. If you want to do a brand new development, is it fairly likely you’re going to find a capital investor to fund?

Fred Pierce:

Yeah. On the capital, student housing has become a darling investment niche of the institutional investment world and that’s both domestic and internationally and they’ve come to realize that it’s a recession resistant asset class. More kids go back to school in a recession, than they do in a non-recession and in a non-recession, it still is a strong asset class. Especially when you’re at the best universities. So institutional capital is plentiful for both development and new acquisitions in student housing. In fact, it sometimes gets insatiable.

So there was a real spread between cap rates in conventional multifamily and student housing over the last couple of years as cap rates really compressed in conventional apartments and capital that was looking for housing all of a sudden looked over at student apartments and they were seeing a cap rate that was one percent higher than the same looking building in conventional and conventional capital gravitated over towards student housing. There’s been some compression in student housing and they’re a little closer now, so maybe it’s a little more balanced, but the bottom line is that smart institutional investors are going beyond the four main food groups of multifamily office, retail and industrial. They’re going into niches like student housing and senior housing and self storage and data centers. They’re going into the niche classes, because it’s a good diversifier in a real estate portfolio. So there’s a lot of capital.

Dean Wehrli:

Are investors usually looking for a given return and is that return more or less, let’s say if they went into a conventional apartment?

Fred Pierce:

So they’re generally looking for a slightly higher return than in conventional apartments. Some will argue one way and some of the other. I will say that it’s a little riskier in student housing, because of the leasing cycle. We only could do it once a year and it’s management intensive. So if you’re going to invest, you really don’t want to hire a third party property manager. You want to do a partnership with an operator, who’s really experienced. Picture if you’re in hospitality, do you want to have someone who doesn’t have a hotel business, running a hotel for you? Well, it’s the same as student housing. You want a really seasoned operator, but then with that, that can mitigate your risk and then you can get really good returns.

Dean Wehrli:

So is that kind of the norm that investor will partner up with an operator from the outset and develop that new student housing? Is that kind of the usual scenario?

Fred Pierce:

Yeah, I’d say it’s one of two. They either don’t partner with an operator and they learn the hard way and then they sell out and then if they come back into the space, they partner up with an operator or they know from the get go, they really need to partner with an operator and then there’s been a lot of consolidation. So what it took to be a top 25 owner 10 years ago, you’ve got to have almost triple the number of beds in your portfolio now, that you did 10 years ago, if you want to be one of the top 25. So there’s been a consolidation and it’s been backed by capital, who are partners with operators like ourselves and they find that’s a prudent way to do it.

Dean Wehrli:

Are the operators very specialized? That is to say, maybe not just your experience, but in general, would a student housing operator not also be a conventional apartment complex operator or manager? Or would they?

Fred Pierce:

Yeah, so I would say the super majority on the management side, that are in student housing, are their own management company. They have the expertise, we do it, companies like mine that do it. There have been a number of student housing companies that have crossed over and they’ve done it both ways. I mean, some crossed over from conventional multi into student years ago. More recently, opportunities have crossed over from student into multi and in those, some of them that have crossed into multi, manage their own. Some of them have third party managers, but definitely those that are in student are managing their own student, because it’s so management intensive.

Dean Wehrli:

Let’s talk a little bit about this locations of student housing. Is there that happy zone? So you’re off campus housing. Is there a happy zone in terms of proximity to that target campus for you, like a mile, a radius or something like that?

Fred Pierce:

It’s very misrepresented and misunderstood. So there’s some groups that say, I only want to be pedestrian, but let’s go back again and say Michigan State, it’s a 5,000 acre campus. What does pedestrian mean? Are you close to your classes? Are you jumping on the campus bus to get to your classes? Are you pedestrian to the football stadium, but nowhere near your classes? Are you close to your classes, but nowhere near the off-campus bars? Or what about the athletic facility? So A, there’s a big misnomer that pedestrian is the be all to end all. Yes, if you’re near the things that people like to do, that kids like to do, or the classes, there’s a premium for that. Usually those are mid-rise buildings and they’re the most expensive. They’re a 1,000 dollars or more per bed with less amenities, but then you got a different product type and you can go to drive properties and the drive properties, majority of them run their own private shuttle service and there’s a shuttle going to campus every 15 minutes and it can oftentimes go to multiple locations.

So it can get you closer to your camp, to your classrooms. Picture if you’re one of these universities and there’s a ton of them that are in a cold weather climate. Would you want to be walking 20 minutes or 25 minutes to get to your classroom from your pedestrian student apartment complex? Or would you rather be half a mile or a mile from campus, get to class in 10 minutes on your shuttle and it drops you really close to your classroom when it’s 30 degrees out? So there’s benefits for all and there’s different price points as well.

Dean Wehrli:

Are there, I don’t know, nearby let’s say city amenities, that you really need to be in place to cite a student council. Does that city have a good bus system or something like that? Do you think about those kinds of qualitative considerations?

Fred Pierce:

Well, you look at all surrounding things, but in regards to transportation, there are some universities that the university runs its own bus service and those go without a huge number of stops, directly to the campus. So those can work. The majority of cases, however, we run private. Shuttles, it’s just part of our operating expenses and we’re getting new shuttles. We run them for five years, we buy a new one and then they say state of the art, you can charge your cell phone and they go directly from the property, right to the campus. Whereas, if you’re on a municipal bus service, you could be 10 stops, 15 stops. So in the distance it may not be that long, but in the time it could be long. So to be workable for students, we need to get them to class in 15 minutes or otherwise the transportation doesn’t work.

So we make that determination. If there’s a service we can subscribe to and it gets them there in 15 minutes, we’d probably be inclined to do it and not have the cost, but if not, then we’re going to pay the cost to run our own shuttle service. As it relates to the other stuff, really what the kids like after that, is proximity to the campus bar scene. So close to that. In some instances we’ve even run shuttles to that. Nobody needs to worry about driving. Thursday, Friday, Saturday night, we’re running shuttles to and from, all the way until two o’clock in the morning.

Dean Wehrli:

Sunday, Monday, Tuesday, Wednesday as well, I think if I remember college.

Fred Pierce:

Right, but being close to that is good, but let’s face it, where the clusters of let’s say the campus serving bars are, there’s not always a whole lot of housing right around them. So only a few can have the luxury of being walkable to that. Other than that, really we provide the amenities and the kids want to live with their friends and complexes don’t usually get larger than a 1,000 beds or they’re too big to manage. So yeah, 500 to a 1,000 beds is a good sweet spot for management efficiency, but the immediately adjacent location and not as critical, unless you’re right there next to the bar scene.

Dean Wehrli:

But you maybe wouldn’t worry about some of the classic considerations that a conventional apartment complex might consider? I don’t know, like visibility or proximity to retail, or would you also consider those things in student housing?

Fred Pierce:

So I would say, less so proximity to retail, visibility for anything. How do you get exposure for tenants to find out about you? Although, I will tell you that word of mouth is way different in student housing than in conventional. Picture a conventional apartment complex with 200 units. How many of the residents living in those 200 units does one of the residents know? Maybe the one across the hall, maybe the ones next to you on either side and otherwise you’re probably off going to work and doing your own business and living your own life. Whereas the students, they’re all hanging out at the pool, they’re down in the fitness center, they all know each other, they’re texting each other and they’re on social media and finding out what’s going on. So the kids all know each other. So word of mouth gets around. You wouldn’t have to be hugely visible, because the word of your complex will get around, but nevertheless visibility still doesn’t hurt and it can help.

Dean Wehrli:

Yeah. How about demographics? I mean, you touched on this a minute ago, but do you think about things beyond just, I don’t know, student population or something like that? Are there other key demographic metrics you’re looking at?

Fred Pierce:

Yeah. You can look at financial aid and the percentage of the student body that qualifies for financial aid and really the students that struggle the most with paying for their college, are not the wealthy kids or the upper income families. They’re not the lowest income kids, because they get Pell grants and they basically get a 100% of their college education paid for, including their cost of housing. It’s the kids in between that their parents maybe make too much money for them to qualify for a Pell grant, but they don’t make enough that they can fund a 100% of their college education or all their housing.

So we can look at demographics and in the percentage of students that qualify for financial aid is one of those. So the other thing we want to look at, are retention rates that if the university has a lower retention rate, it’s harder to maintain enrollment. If only 65% of your freshmen become sophomores and stay with you, you got to constantly be filling the pipeline. Whereas if you’ve got over 90% of your students are continuing with you, then it’s a better enrollment outlook. So the enrollment is really where we look, we don’t want declining enrollment. We want either level enrollment or growing enrollment.

Dean Wehrli:

Okay. Let’s end with a few questions on what you see going forward. Some trends, maybe. The first is, do you see that…are we in a world of not just increasing enrollment in college, but also increasing demand for student housing? Are we back in that kind of positive trend for your business?

Fred Pierce:

Where it’s at, matter of fact, people should not get lost at the super macro level, because enrollments are growing for the next several years and then they’re leveling off, out maybe another decade at higher education. What there is, is there’s going to be the haves and the have not’s, right? The most in demand universities are going to be able to control their enrollment destiny. So you want to start with being at a strong university with a strong enrollment outlook. Once you do that, then the opportunity to buy existing or build new, is robust, because you’re at a place where the demand is going to be steady and it’s going to be predictable. On the other hand, and so for us, out of 10,000 post secondary educational institutions, we target 50, the top 50. By the way, that doesn’t include, let’s say Ivy League schools, because as I mentioned before, those private universities control all their own housing.

Those are largely your Power Five football conference universities. Your big, large public universities are largely where we’re going and there the outlook is really great. Then if you look at enrollment, growth and other demographics, that looks strong going forward. One other question you might ask or people should be interested in is, the pivoting to online learning, is that changing the outlook and the delivery of higher education going forward? What I would say is, for a student housing investor or operator or developer, going to the kind of universities that I just described, it’s not going to change the interest of 18 to 22 year olds, to go to college and live at college and get the full college experience. It’s way more than what you get in between your ears and what you get in the classroom. It’s about growing up and living on your own, having fun, meeting friends, the whole college experience.

So they’re not going to give that up. In my lifetime, that’s not going to materially change. Might some portion of a given class, be given online? Yeah. Might even selected classes be online? Okay. So you got five classes and one’s online and four are in person. You’re still going to be at school. Where it may have an impact is in graduate education, where people may be working and it’s less convenient to get to the campus. They just are looking for that degree, less the college experience. They want that paper at the end, that master’s degree. They want the content that they’re going to get from that. There’ll be much more of that being delivered online, but that’s not a very big portion of the demand for student housing. Those are the poor students who are looking for the cheapest housing they can get, not the shiniest, newest mid rise student apartment complex.

Dean Wehrli:

Social aspects are just more important for those undergrads, than they are for the grad students.

Fred Pierce:

That’s absolutely right. You’ll see more hybrid, where almost like the executive programs, where you might be on campus for a week and then you’re six weeks doing it online or things like that. We’ve got a hybrid program, I chair the board at Franklin Pierce University and we’ve got a doctor of physical therapy program, where there’s classroom instructions, where that’s being done online, but then your clinical rotations, you can’t do that online. You got to be in clinic. There’s parts of it that have to be in person and other parts that can be online. Those are graduate programs as well, where they’re looking for something more specific than the broad experience an undergrad is looking for.

Dean Wehrli:

The online aspect was by the way, my next question. So my last few questions, we’re going to be kind of, what do you see as the major threats to student housing and what do you see as the major opportunities? Am I wrong for the first part, because I would’ve thought that online housing was still going to be your biggest threat, the student housing?

Fred Pierce:

Yeah.

Dean Wehrli:

Is it or is there something else?

Fred Pierce:

No. It’s not, because the kids want to be there. They proved that through the pandemic, irrespective of whether a university delivered completely or largely online or completely or largely in person, the kids still came back to school and wanted to be at school. They may have taken that very first semester, not known what to do and stayed at home and then they’re pulling their hair out. Kids wanted to get away. The parents wanted them back at school. So it’s proven that that is not the disruptor. What the disruptor will be, is absolute demographics for universities that are less in demand. You’re seeing some of those traditional, private liberal arts schools that maybe aren’t Ivy league and maybe aren’t linked with a major religious denomination, which is a feeder, like the Notre Dames of the world or the BYU’s of the world, that their faith feeds their enrollment.

                But if you’re unaffiliated and you’re a small liberal arts school, you’re at risk. I could even say, what about some publics that you could look at, that just don’t have demographics? They’ve had successive years of declining enrollment. Might some of those become completely online universities, because they don’t have demographics in their physical location? And maybe those campuses get sold off or redeployed or something. So it will be, but not in the most selective, not in the most popular. It’s just out of 10,000 post-secondary education institutions, could that become 8,000? Sure it could. There will be shakeout, but as investors know, student housing, it’s only going to be those that are on the periphery and at risk universities or universities with really declining enrollment, where now something needs to happen. It’s like repurposing a shopping center. We are staying in some of those instances, converting student apartments into conventional. Maybe there’s a job base, but the university is shrinking. So as long as you start with your university and it’s a strong university with a strong outlook, then your investment is in good shape.

Dean Wehrli:

I thought the biggest disruptor to college life was beer bongs. Especially when a friend puts a shot of Everclear in your beer bong that you didn’t know about. You know who you are, Rick, but it turns out, is not. I was wrong about that. Let’s end with this. Are the opportunities really kind of going back to what you’ve said, the biggest opportunities are going to be in those haves? Those big, consistent universities that are already the haves. So in other words, the haves are going to be more the haves and the have not’s, maybe more the have not’s? Is that fair?

Fred Pierce:

That’s what I think, but if you think about conventional apartments, most of the big players go to the big MSAs and they go to the populations that are increasing. The difference was in the decade of the 2000s, enrollment in higher education in America grew by 38%. So 3.8% a year, you could have gone anywhere and it filled up, because there just wasn’t enough housing. Now you need to be smart, you need to be selective. You need to pick good places. Then you’ll make good investments, but don’t pick bad places, because you won’t like the outcome there, if you do.

Dean Wehrli:

Words to live by. Well, Fred, thank you so much for coming on. That was a lot. We do occasionally student housing, feasibility studies here, but that’s a lot to learn. I soaked up a ton. I hope our listeners did as well.

Fred Pierce:

Well, very much appreciate it. Thank you for the opportunity.

Dean Wehrli:

Absolutely. This has been New Home Insights with Dean Wehrli, your host. We will see you in a couple of weeks.


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