Pierce: There's been consolidation for several reasons. To start with, when any industry—not just real estate—gets fractionated, it tends to not have strong consolidated ownership as industry leaders. What this means is there's tremendous investment opportunity. With economy of scale in any business comes incremental expertise and efficiency in operations. You can afford to hire more senior personnel that you couldn't otherwise afford without a large company or portfolio. Your cost of services decreases because you develop preferential vendor relationships from buying more. That applies here. While the four main food groups of real estate (office, industrial, retail and multifamily) have been highly efficient for a very long time—and most certainly in the US since the boom of REIT IPOs in the 1990s when much of the food groups in real estate went public—now they're burgeoning public REIT marketplaces in addition to private marketplaces. But this is not the case in student housing. We now have only two publicly traded REITs, and if you look at those in their respective market share, it's still relatively small in this space. Because ownership was so fractionated, it meant consolidation could lead to improved investment performance. It was the right time for consolidation. This has been going on for the last 10 to 15 years and should continue to do this going forward.

GlobeSt.com: Does consolidation make the sector stronger?

Pierce: It absolutely makes the sector stronger because essentially, you've got a growing group of more experienced operators. Student housing is an asset-management-intensive asset type. It's closer to hospitality and senior housing than to multifamily in some of the characteristics. It's shown really good performance, but will show even better performance when the most experienced owners and operators are controlling a bigger share of the market.

GlobeSt.com: Is there additional institutional equity capital coming to the market?

Pierce: Yes, and the most compelling metric of this is that big institutional investors are composed of pension funds, life companies, sovereign wealth funds and endowments—and they all belong to the Pension Real Estate Association. Every year, PREA does a survey of investment intentions. They pretty much when they ask those investors, “Where do you intend to invest your real estate allocation next year?” Up until 2014, the respondents had been given just four choices, which included the four main food groups of real estate, and then PREA started getting feedback that that doesn't cover all the places where these investors were planning to invest. Along came 2015, and PREA decided to create a category called “other.” In 2015, investors indicated that 18% of their capital was going to be invested in “other” real estate. From this survey, they received anecdotal comments that indicated what “other” meant to these respondents. These included student housing, senior housing, healthcare real estate, medical office, self-storage and data centers. We're talking hundreds of billions of dollars of institutional capital ultimately going into the “other” category. So, for 2016, PREA decided to give their survey respondents choices other than “other.” They specifically added student housing and healthcare real estate, and the balance was called “other.” I think the allocation to student housing ranged from 4% to 8% that year. In late 2015, indicating their investment intentions for 2016, student housing and healthcare were the most popular “other” categories, and they had measurable results in those categories. Fast forward to 2017, and PREA then broke it out between domestic and international, but for us, in 2017, more than 40% of domestic institutional investors indicated an intent to invest in student housing in 2017. This speaks to an increasing institutional appetite for the category.

GlobeSt.com: Why are larger institutional investors interested in investing in niche sectors of commercial real estate such as student housing, senior housing, healthcare real estate and self-storage?

Pierce: There is a strong diversification benefit from the “other” category. Most of these investors have become fully invested in their real estate allocation in the four major food groups. That doesn't mean they don't move allocations between office, industrial, retail and apartments to see what performs better, but they have been in those spaces and are fully allocated there. Also, the general institutional feeling is that cap rates have dropped to an almost bubblicious level, so they're looking for a) a diversification benefit, and b) something recession proof. Most of the other CRE sectors have a strong correlation with the economy, and there's some feeling that we may be on the precipice of recession. So, there's a defensive nature to it.

The sector has now become institutionally qualified and recognized. While the space could certainly support more public companies, it has seen increased sophistication in the growth of private companies. There's a transparency that most public companies provide that pre-qualifies the space, and everybody is buzzing about student-housing investment.

GlobeSt.com: How are international investors viewing the student-housing market?

Pierce: Interest from international investors in student housing has dramatically increased. One of last year's biggest deals was the Canada Pension Plan Investment Board, Government of Singapore Investment Corp. and the Scion Group's acquisition of University House, the branded student-housing division of Inland American Communities' non-traded public REIT. Ninety-five percent of the equity was contributed one-half each by Canada Pension Plan and Government of Singapore Investment Corp. Also, Landmark Properties, one of the leading student-housing developers, received a $600-million investment from Abu Dhabi Investment Authority. Also, for Aspen Heights, largely a developer of student-housing cottage projects, received an entry-level investment from Safanad, a Middle-Eastern investment firm made up of largely of high-net-worth investors. So yes, there is a growing level of international interest.

I receive multiple calls every month from sources interested in student housing from the Middle East, China, South Korea and South America. Some are questioning whether or not the White House's position on foreign relations may dampen international investment interest in the US, but my personal opinion is that I don't think that it will be in any material way. If there is a shift, it will be very short term. US commercial real estate is still a safe haven, and the wealthiest Chinese are trying to get as much money out of China and into the US as possible.

GlobeSt.com: Why has there been a significant factor in the shift from public to private ownership of student-housing properties?

Pierce: The answer is twofold. One of the public companies was taken private, which affected a couple of billion dollars in assets. That's significant in the student-housing space. They had a poor investment strategy and equally poor execution of the operating side of their business. But, equally important has been the dramatic growth of private companies. Since the onset of the Student Housing Business Magazine survey in 2010–coming out of the Great Recession–total beds owned by the top 25 owners has increased 75% from 276,412 in 2010 to 482,684 in 2016. Notably, that top-25 growth comprises a 97% increase in beds owned by private companies (168,577 bed increase), as compared to a 37% growth (37,695 increase) in beds owned by the public REITs. This growth by private companies has largely been fueled by the influx of institutional capital into the student housing sector.

SAN DIEGO—Now that it's recognized as a viable and profitable alternative category for those looking to diversify, student housing is encouraging strength of scale and drawing private, public and international investors, Pierce Education Properties L.P.'s president and CEO Fred Pierce tells GlobeSt.com. Pierce recently noted that the top 25 owners in the student-housing sector continue to dominate student-housing ownership, with their annual market share of the AXIO 175 markets (which reflects the 175 national student housing markets surveyed by Axiometrics) ranging from 59% to 69% and averaging 65% in recent years. This shows that as more than 261,000 new beds were delivered to the national marketplace since 2010, the majority of that additional supply has either been held by or sold to the top 25 owners.

In addition, the aggregate beds owned by the top 25 has increased 75% since 2010 from 276,412 to 482,684 beds today, Pierce says. The relative market share also affirms that the top 25 remain the major players in the acquisition of existing student housing assets.

We spoke with Pierce about consolidation in the student-housing sector and what these investors look like.

GlobeSt.com: Why has there been consolidation in the student-housing industry?

Pierce: There's been consolidation for several reasons. To start with, when any industry—not just real estate—gets fractionated, it tends to not have strong consolidated ownership as industry leaders. What this means is there's tremendous investment opportunity. With economy of scale in any business comes incremental expertise and efficiency in operations. You can afford to hire more senior personnel that you couldn't otherwise afford without a large company or portfolio. Your cost of services decreases because you develop preferential vendor relationships from buying more. That applies here. While the four main food groups of real estate (office, industrial, retail and multifamily) have been highly efficient for a very long time—and most certainly in the US since the boom of REIT IPOs in the 1990s when much of the food groups in real estate went public—now they're burgeoning public REIT marketplaces in addition to private marketplaces. But this is not the case in student housing. We now have only two publicly traded REITs, and if you look at those in their respective market share, it's still relatively small in this space. Because ownership was so fractionated, it meant consolidation could lead to improved investment performance. It was the right time for consolidation. This has been going on for the last 10 to 15 years and should continue to do this going forward.

GlobeSt.com: Does consolidation make the sector stronger?

Pierce: It absolutely makes the sector stronger because essentially, you've got a growing group of more experienced operators. Student housing is an asset-management-intensive asset type. It's closer to hospitality and senior housing than to multifamily in some of the characteristics. It's shown really good performance, but will show even better performance when the most experienced owners and operators are controlling a bigger share of the market.

GlobeSt.com: Is there additional institutional equity capital coming to the market?

Pierce: Yes, and the most compelling metric of this is that big institutional investors are composed of pension funds, life companies, sovereign wealth funds and endowments—and they all belong to the Pension Real Estate Association. Every year, PREA does a survey of investment intentions. They pretty much when they ask those investors, “Where do you intend to invest your real estate allocation next year?” Up until 2014, the respondents had been given just four choices, which included the four main food groups of real estate, and then PREA started getting feedback that that doesn't cover all the places where these investors were planning to invest. Along came 2015, and PREA decided to create a category called “other.” In 2015, investors indicated that 18% of their capital was going to be invested in “other” real estate. From this survey, they received anecdotal comments that indicated what “other” meant to these respondents. These included student housing, senior housing, healthcare real estate, medical office, self-storage and data centers. We're talking hundreds of billions of dollars of institutional capital ultimately going into the “other” category. So, for 2016, PREA decided to give their survey respondents choices other than “other.” They specifically added student housing and healthcare real estate, and the balance was called “other.” I think the allocation to student housing ranged from 4% to 8% that year. In late 2015, indicating their investment intentions for 2016, student housing and healthcare were the most popular “other” categories, and they had measurable results in those categories. Fast forward to 2017, and PREA then broke it out between domestic and international, but for us, in 2017, more than 40% of domestic institutional investors indicated an intent to invest in student housing in 2017. This speaks to an increasing institutional appetite for the category.

GlobeSt.com: Why are larger institutional investors interested in investing in niche sectors of commercial real estate such as student housing, senior housing, healthcare real estate and self-storage?

Pierce: There is a strong diversification benefit from the “other” category. Most of these investors have become fully invested in their real estate allocation in the four major food groups. That doesn't mean they don't move allocations between office, industrial, retail and apartments to see what performs better, but they have been in those spaces and are fully allocated there. Also, the general institutional feeling is that cap rates have dropped to an almost bubblicious level, so they're looking for a) a diversification benefit, and b) something recession proof. Most of the other CRE sectors have a strong correlation with the economy, and there's some feeling that we may be on the precipice of recession. So, there's a defensive nature to it.

The sector has now become institutionally qualified and recognized. While the space could certainly support more public companies, it has seen increased sophistication in the growth of private companies. There's a transparency that most public companies provide that pre-qualifies the space, and everybody is buzzing about student-housing investment.

GlobeSt.com: How are international investors viewing the student-housing market?

Pierce: Interest from international investors in student housing has dramatically increased. One of last year's biggest deals was the Canada Pension Plan Investment Board, Government of Singapore Investment Corp. and the Scion Group's acquisition of University House, the branded student-housing division of Inland American Communities' non-traded public REIT. Ninety-five percent of the equity was contributed one-half each by Canada Pension Plan and Government of Singapore Investment Corp. Also, Landmark Properties, one of the leading student-housing developers, received a $600-million investment from Abu Dhabi Investment Authority. Also, for Aspen Heights, largely a developer of student-housing cottage projects, received an entry-level investment from Safanad, a Middle-Eastern investment firm made up of largely of high-net-worth investors. So yes, there is a growing level of international interest.

I receive multiple calls every month from sources interested in student housing from the Middle East, China, South Korea and South America. Some are questioning whether or not the White House's position on foreign relations may dampen international investment interest in the US, but my personal opinion is that I don't think that it will be in any material way. If there is a shift, it will be very short term. US commercial real estate is still a safe haven, and the wealthiest Chinese are trying to get as much money out of China and into the US as possible.

GlobeSt.com: Why has there been a significant factor in the shift from public to private ownership of student-housing properties?

Pierce: The answer is twofold. One of the public companies was taken private, which affected a couple of billion dollars in assets. That's significant in the student-housing space. They had a poor investment strategy and equally poor execution of the operating side of their business. But, equally important has been the dramatic growth of private companies. Since the onset of the Student Housing Business Magazine survey in 2010–coming out of the Great Recession–total beds owned by the top 25 owners has increased 75% from 276,412 in 2010 to 482,684 in 2016. Notably, that top-25 growth comprises a 97% increase in beds owned by private companies (168,577 bed increase), as compared to a 37% growth (37,695 increase) in beds owned by the public REITs. This growth by private companies has largely been fueled by the influx of institutional capital into the student housing sector.