Student housing developments are almost always falling behind their deadline, no matter how hard building companies try not to. Construction labor shortages are pushing developers’ creativity when it comes to delivering properties on time.
With roughly 6,000 beds in 10 properties across the U.S., PEBB Capital division PEBB Capital Student Living focuses on value-oriented assets. Until now, the company has invested more than $25 million in renovations that eventually resulted in Class A student housing properties.
Todd Benson, director of PEBB Capital Student Living, shared with Multi-Housing News details about how developers are keeping up with the booming student housing demand in some markets, while also dealing with the repercussions of construction labor shortages. Additionally, PEBB Capital Principal & Managing Director James Jago touches on trends to watch in the student housing market.
What are the effects of the construction labor shortage on student housing?
Benson: Student housing developments must open timely in coordination with the academic year. When subs cannot meet the demand due to lack of manpower, it creates a domino effect and student projects are in jeopardy of missing delivery dates which sponsors must carefully manage.
Contractors are busier and the availability of labor is impacting the amount of subs bidding on jobs. We are seeing significant pricing variability due to this dynamic.
Given these challenges, what are developers doing in order to keep up with rising demand?
Benson: We are obsessively focused on our schedule and critical path, we diligently vet and select sub-contractors to ensure that they have the capacity to handle our projects and can make up time if we fall behind. Often times, we do not go with the low bidder.
How have students’ needs and expectations changed over the past few years?
Jago: We note a reorientation of amenity space and student focus back to programming that serves to enhance the academic live-work-play experience. Whether it’s in the form of public-private partnerships where academic space, lab space and innovation centers are being coupled with housing, or in the form of private owners recognizing this shift and tailoring their amenity spaces to meet this evolving demand, we believe the era of the all-out amenity war to lure the highest rent may be fading.
Please talk about trends to watch in the student housing market this year.
Jago: We’re keeping an eye on a potential pullback by some of the large institutional/sovereign investors that have been the high bidders for brand new, Class A core product. Whether it’s because student housing allocations are becoming maxed out or existing portfolio performance is stalling, we’re already seeing demand for this product soften a bit, especially in markets where the new supply pipeline exceeds projected enrollment growth. A pullback by these investors will have a meaningful impact on the developers/merchant builders who have been relying on those buyers as their exit.
As alluded to above, certain markets are experiencing new supply that is becoming increasingly challenging to absorb. Over the last few years, an increasing amount of product at the highest tier of the rent spectrum has been delivered, in many cases representing a higher percentage of the existing housing stock than the percentage of students in the market who can afford the rents. In such cases, something has to give and its likely going to come from the properties that were previously at the top of the market, but are being replaced by the shiny new toy being delivered, which may create buying opportunities for core plus buyers.
What can we expect from the student housing market going forward?
- increasingly diligent assessments of market fundamentals
- heightened focus on intrastate migration, demographic drivers, high school graduate and international student counts, and recruiting reach of universities
- a slowdown in the push into tertiary markets in seek of yield
- fewer massive portfolio trades resulting in lower overall volume, partially offset by continued aggressiveness of value-add buyers as interest rates remain lower for longer than expected
Which markets does PEBB Capital Student Living plan to invest in going forward?
- elite universities with inelastic demand
- underserved urban markets with high densities of universities
- tier 1 universities in high-growth states benefitting from intrastate migration and demographic tailwinds
In what stage is your project in the Morningside Heights neighborhood of New York City? What other projects do you have in the pipeline?
Benson: Our project adjacent to Columbia University in Morningside Heights is under construction. Foundations are complete and superstructure will start in April. Completion will be in the academic year 2020. Our NYC plans include two-three more conversion and new construction projects in the next 12-18 months.