RALEIGH, NC — The first panel discussion at CAPRE’s inaugural Carolinas Student Housing Forum was a round-table titled “Carolinas Student Housing 360: Development, Investment & Leasing Activity in 2019.” To kick off the session, Moderator Brian Klebash, CEO and Founder of CAPRE, looked to his group of panelists and asked them to make some tough analysis. For example, how they might respond to an influx of beds in a market they just broke ground in. After some discussion on that point, a member of the audience stood to ask a follow-up question.
“How are you guys changing your underwriting in markets where you’ve got on-campus coming in or another company, if you’re looking at a deal in that market?” he asked.
First to offer a response was Andy Feinour, Chief Executive Officer of Student Quarters. “You’re underwriting as much as 80% revenue and 20% expenses, right? We have pretty good visibility about what our expenses are going to be. We’re pretty comfortable that we can predict it out,” he quickly replied. “The question is always about how revenue is going to turn out – where is the occupancy going to be? Where are rents going to end up at, and how much growth can you get in those? And then, what are your off-sets, like concessions and other things?”
Next, Feinour provided an example. “We bought a deal out in Northern Oklahoma, which is the posterchild for an over-supplied market, with more supply coming on-campus,” he shared. “That deal has been maybe our best performing deal that we’ve ever done. The reasons for that is, all of the supply that came on campus, which was over 1500 beds, didn’t meet the expectations of the students that would live there. They went super small, doubled up in rooms and in kitchens and stuff, and the market didn’t accept it. So we were able to leverage our off-campus location, which was in a great location, to our advantage.”
“We did extraordinarily well in the face of adversity. But that’s not always the case. So we’ve gotten much more conservative in our occupancy underwriting, and much more conservative in rent growth, and in concessions,” concluded Feinour. “Not for the life of the whole, but for the duration of the period in which you believe it’s going to take to get back to stabilization. So from our perspective, that’s what we’re doing.”
Next, Donna Preiss, Founder and Chief Executive Officer at TPCO chimed in with a different perspective. “We change up quite a bit in our underwriting….but if it meets the criteria of the top 100 and a diversified job market – and we don’t insist on both of things, but if it does have both of those things – then we’re going hard,” she began. “If you’re competing against us on a deal, you better put on your big girl pants, because we’re going to come up really tough on this. If it meets those criteria, then we’re not afraid to say that we can get 9% on revenue growth. And what we believe is that, if we do the underwriting, and we can only show 3%, then we can’t do the deal. Because the numbers just won’t work.”
“So often, I’ve found that people say, if you put in a 3% rental rate growth and you take it to your development partner and they say, we don’t feel comfortable with anything over 3, then I say, don’t do the deal. Because I don’t want to do a deal that’s only 3. So what happens is, if we look at 3% rental rate growth over the portfolio, I haven’t had anything that’s had 3%,” she stressed, wrapping up her remarks. “I’ve had some -7%, I’ve had some 12%, 13%s. at the end of the day, be particular about what you want to go after, and if it meets that criteria, then get it done. We’ve done $480 Million USD as of the end of the year, in 10 transactions. And yet we’ve probably underwritten fewer overall deals than we ever have. So if it meets that criteria, we go hard.”