By Shawn P. Lubic, Senior Financial Analyst, Capital Markets, Cushman & Wakefield, Toronto
Welcome to part one of a blog series in which I will explore the differences between U.S. and Canadian student housing industries based on interviews with professionals on both sides of the border.
By way of background, I’m a native Philadelphian currently working for our Capital Markets team in Toronto. Due to my prior work experience I have a particular fascination with student housing. One of the first things I noticed in my new role in Canada was the absence of a significant student housing industry compared to what exists in in the States. The question is, does this present an opportunity to investors?
U.S. Student Housing Overview
Student housing is a stand-alone asset class in the U.S. with an entire industry built around it. According to a recent survey (prepared by FourPoint), 149 student housing transactions were completed in the U.S. in 2017, totaling $9.65 billion, 27,000 units, and close to 74,000 beds. Approximately 47% of this volume was purchased by foreign capital, 18% by syndicators, 14% by funds, and 10% by REITs. There were 103 new student housing properties built in 2017, totaling approximately 15,700 units and 47,000 beds. It’s a very large and growing industry!
Canadian Enrollment Sets the Stage
Canada has 93 universities with a total enrollment of 1.7 million students. Seven universities attract more than 40,000 students each and four are above 50,000. The University of Toronto had a total enrollment over 89,000 in 2016-17. So, why isn’t there a large and well-established student housing industry in Canada? Or is there?
Solving the Mystery
In this series of blogs, I’ll try to solve “the mystery of the missing industry” through interviews with people on the front lines who have their finger on the sector’s pulse. First up is my interview with Gary Holloway, a former employer and U.S. student housing pioneer. When I joined GMH Capital Partners in 2002, Gary and his son Gary, Jr. were well established industry leaders. To date, their firm has owned some 80,000 student housing beds since its inception.
Gary Sr. kindly agreed to answer some of my questions about his role in the industry’s evolution in the U.S. – and what he sees for the future. Read on!
SL: What were you doing prior to specializing in student housing?
GH: In 1985, I started my own business GMH Associates. Prior to that I was CFO of my father’s family business, which had a real estate development arm and also owned various operating companies. Before that I worked in accounting for Touche Ross in the tax department.
SL: Why did you get into student housing?
GH: When I formed GMH Associates I was focused on building a real estate operating company. My first acquisition was a multifamily project in State College, PA, which was a mix of senior and student housing. After operating the project I realized that the student housing market was underserved so I started to develop a business plan around catering to students. My second asset was also in State College, PA. I later purchased an asset in Pittsburgh servicing Duquesne and then grew the portfolio heavily in the mid-1990s.
SL: What was your first really big acquisition?
GH: Early on, the industry was highly fragmented with local mom-and-pop owners. We actually served as a take out for many of the purpose-built early developers in the space. We formed a joint venture with Goldman Sachs in 1995 and acquired a portfolio of 10,000 beds valued at $1 billion in 1995 dollars. This was the largest roll up of student housing at the time.
SL: What market dynamics reinforced your confidence in student housing?
GH: In the early years, there were huge spreads of about 200 basis points between student housing cap rates and conventional apartment cap rates. I saw that the risk everyone perceived in the student space did not warrant such a drastic spread. Today, the spread has almost completely eroded. We also saw pent-up demand for quality housing at nearly every university. In our early research we determined that college enrollments were increasing at staggering rates and that the housing stock could not keep up with projections.
SL: What were your first target markets, and why?
GH: Our first target markets were the largest state systems or institutions with enrollments of 30,000-plus students. They were the low-hanging fruit at the time with the largest pent-up demand. It was also easier to convince institutional equity to invest at larger universities. The early investments in addition to Penn State included schools such as University of Missouri, The University of Tennessee, Ohio State University, Texas A&M University, University of Illinois, and University of Wisconsin.
SL: What were early pitfalls and how did you overcome them?
GH: An early pitfall was learning to manage the turn process. Since we were largely operating on 11-12 month leases we had to learn how to turn 50% (or more) of a property in two to four weeks. This required staff that was trained in process and vendors who had the staff and resources to move as fast as we were. We had a lot of growing pains in finding the right vendors in our early days. We overcame this by forming teams that could train our newly acquired properties in the art of a turn. We also built out our vendor pool and, where possible, developed national relationships.
SL: What innovations did you bring to the sector?
GH: We like to think that we were the first to adopt by-the-bed leases in off-campus housing, but that is something that key insiders in the space often chuckle about and is up for debate. We definitely pioneered the parental guarantee and the joint-and-several leasing philosophy.
We also adopted the fully-furnished apartment concept early in our growth and learned that by furnishing all the units we were able to turn properties more efficiently and get an outstanding return on the investment in furnishings. Some of our best deals ‘return wise’ were on early acquisitions that we were able to furnish and get a premium by going to by-the-bed leasing.
Bundling of services and giving parents an all-in pricing model also was an early concept. Parents loved the idea of writing one cheque and not having to worry about how much their son our daughter spent on utilities or cable.
SL: What are you most proud of regarding your history in student housing?
GH: I am proud of the fact that so many people and companies got their start with GMH. At our peak we employed over 2,000 people in the REIT and many of these folks are the industry leaders of today.
SL: How is the student housing market different today?
GH: The industry has changed in so many ways. For starters there are countless new players driven by ever-increasing liquidity in the market. New equity continues to drive pricing to all-time high levels and I don’t think this is changing anytime soon.
The product that is being built today is now vertical and constructed of concrete and steel as opposed to stick built. With vertical construction, assets are closer to campus. In our legacy portfolio we were easily 1.2 miles on average from campus and today our portfolio is under .25 miles on average.
SL: Where are the opportunities today?
GH: I believe there are still good opportunities to be had in developing new assets. You need to be disciplined on what markets should be developed and show discipline in deploying capital. We believe we are aggregating the highest-grade institutional portfolio in the market made up of assets that will withstand the test of time based on construction quality and location.
SL: What are your plans moving forward?
GH: We recently formed a strategic partnership with AGC out of London. AGC tailored a fund around our platform and we are currently deploying the fund. The fund is targeting core acquisitions, pedestrian to campus, as well as development. By developing and acquiring, we are able to deliver a solid return and offer stable cash flow out of the gate. So far, we have acquired three assets in the new fund and we are under agreement on two additional assets.
Part 2: Where the Student Housing Industry Stands Canada
Stay tuned! My next blog will ask both U.S. and Canadian experts to weigh in on where student housing stands in Canada, how it differs from the U.S., and where opportunities may exist for investors.
A special thanks goes out to Gary Holloway and Gary Holloway Jr. for participating in this first blog.
Shawn P. Lubic, Senior Financial Analyst, Capital Markets, Cushman & Wakefield, Toronto, has 24 years of commercial real estate experience in investment sales brokerage and financial analysis/valuation across all commercial property types. Shawn has been responsible for the disposition of investment-grade real estate for private and institutional sellers on a local, regional, and national level. Shawn also provides advisory services in the areas of market research, lease analysis, acquisition underwriting, mortgage financing, REO and foreclosure evaluation, real estate tax appeal, and portfolio management.