GlobeSt.com: Why are more student housing properties trading?

Pierce: At an estimated $10 billion in investment sales, 2016 produced the largest volume of transactions in industry history—double the next closest year—driven by large portfolio sales including Harrison Street's privatization of Campus Crest and Scion's purchase of University House. Increased volume of trades is due to the confluence of a larger supply of properties available for sale and a continued influx of institutional capital into the space. The disposition bubble was driven by: (a) several sales of large portfolios that had been assembled over many years, (b) new deliveries in 2013 and 2014 waiting longer to sell than the historical norm (which previously included more pre-sales), (c) a large volume of 10-year debt maturities from acquisitions during the last peak cycle in 2006 and (d) the normal volume of other annual dispositions. The large acquisition appetite came from institutional investors—domestic and increasingly foreign—seeking the higher-yield, cash flow and diversification benefits offered by student housing when compared to conventional multifamily.

GlobeSt.com: What does student housing reveal about the broad causes of low investment volume?

Pierce: I believe the lower level of investment-sales activity in all classes of commercial real estate in the first half of 2017 are due to: (1) a common perception that commercial real estate prices were potentially reaching the peak of the current cycle, (2) institutional investors largely having becoming fully invested with their real estate allocation after years of being under-weighted to real estate, (3) the rise in interest rates after the presidential election causing some correction in prices and (4) uncertainty about which of and how President Trump's expected policy directives will impact the economy, income taxes and ultimate real estate values.

GlobeSt.com: What is the outlook for student-housing property sales as you see it?

Pierce: The outlook for student-housing investment sales remains strong, with a steady anticipated volume of transactions expected in 2017. Current estimates for the first half of 2017 are projecting sales of $1.5 billion to $2 billion. I would expect the annual volume to reach the $4-billion to $5-billion range, which brackets the highest volume years in industry history excluding the anomaly that portfolio sales brought to 2016.

GlobeSt.com: How do you see student-housing sales volume winding up for the rest of the year?

Pierce: I expect 2017's seasonal transaction volume to follow that of most years in the past, with as much as 40% to 60% of annual closings occurring in the fourth quarter. Setting aside a typical year-end rush that is shared by all real estate asset classes, student housing always has a robust fourth quarter since both buyers and sellers prefer to close student-housing transactions shortly after the rent roll is set for the ensuing academic year, which happens in August and September.

Sellers as much as buyers prefer buying in the fall. Lenders also are increasingly apprehensive to fund loans in the summer, choosing to wait to affirm the number of “heads on beds” for the next academic year. The same goes for sellers who believe they get the best value after their rent roll is set (and highly occupied). and buyers like to have a full year's runway in control of pre-leasing, which a fourth-quarter purchase provides. I also see signs that investors are waiting for the increased annual volume of offering packages to be brought to market, which typically starts to happen in August and September.

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SAN DIEGO—The success of the student-housing sector follows a significant trend of institutional investors diversifying away from the four “food groups” of CRE and allocating a portion of their real estate capital to less-correlated niche asset classes, Pierce Education Properties' founder, CEO and president Fred Pierce tells GlobeSt.com. We spoke with Pierce for an update on investment in the sector, how it compares to other types of multifamily properties and his expectations for its future.

GlobeSt.com: The volume of commercial-property sales overall is decreasing, although student housing is doing better than other kinds of multifamily. How long can this continue?

Pierce: This is following a significant trend of institutional investors diversifying away from the traditional four main “food groups” of commercial real estate (multifamily, retail, office and industrial) and allocating a portion of their real estate capital to less-correlated niche asset classes including student housing, senior housing, healthcare real estate, medical office, self-storage, data storage, etc. In subsequent years, continued interest in the sector has caused PREA to add student housing and healthcare real estate as their own categories in the annual survey.

In 2017, more than 40% of domestic institutional investors indicated an intent to invest in student housing. I predict that in the foreseeable future, it will be the norm for institutional investors to establish dedicated asset allocations to both student housing and senior housing within their multifamily allocations. With the current and continued projected interest in the space, I believe student housing is here to stay as a recognized niche sector of commercial real estate, and a growing amount of institutional capital will be allocated to the space.

GlobeSt.com: Why are more student housing properties trading?

Pierce: At an estimated $10 billion in investment sales, 2016 produced the largest volume of transactions in industry history—double the next closest year—driven by large portfolio sales including Harrison Street's privatization of Campus Crest and Scion's purchase of University House. Increased volume of trades is due to the confluence of a larger supply of properties available for sale and a continued influx of institutional capital into the space. The disposition bubble was driven by: (a) several sales of large portfolios that had been assembled over many years, (b) new deliveries in 2013 and 2014 waiting longer to sell than the historical norm (which previously included more pre-sales), (c) a large volume of 10-year debt maturities from acquisitions during the last peak cycle in 2006 and (d) the normal volume of other annual dispositions. The large acquisition appetite came from institutional investors—domestic and increasingly foreign—seeking the higher-yield, cash flow and diversification benefits offered by student housing when compared to conventional multifamily.

GlobeSt.com: What does student housing reveal about the broad causes of low investment volume?

Pierce: I believe the lower level of investment-sales activity in all classes of commercial real estate in the first half of 2017 are due to: (1) a common perception that commercial real estate prices were potentially reaching the peak of the current cycle, (2) institutional investors largely having becoming fully invested with their real estate allocation after years of being under-weighted to real estate, (3) the rise in interest rates after the presidential election causing some correction in prices and (4) uncertainty about which of and how President Trump's expected policy directives will impact the economy, income taxes and ultimate real estate values.

GlobeSt.com: What is the outlook for student-housing property sales as you see it?

Pierce: The outlook for student-housing investment sales remains strong, with a steady anticipated volume of transactions expected in 2017. Current estimates for the first half of 2017 are projecting sales of $1.5 billion to $2 billion. I would expect the annual volume to reach the $4-billion to $5-billion range, which brackets the highest volume years in industry history excluding the anomaly that portfolio sales brought to 2016.

GlobeSt.com: How do you see student-housing sales volume winding up for the rest of the year?

Pierce: I expect 2017's seasonal transaction volume to follow that of most years in the past, with as much as 40% to 60% of annual closings occurring in the fourth quarter. Setting aside a typical year-end rush that is shared by all real estate asset classes, student housing always has a robust fourth quarter since both buyers and sellers prefer to close student-housing transactions shortly after the rent roll is set for the ensuing academic year, which happens in August and September.

Sellers as much as buyers prefer buying in the fall. Lenders also are increasingly apprehensive to fund loans in the summer, choosing to wait to affirm the number of “heads on beds” for the next academic year. The same goes for sellers who believe they get the best value after their rent roll is set (and highly occupied). and buyers like to have a full year's runway in control of pre-leasing, which a fourth-quarter purchase provides. I also see signs that investors are waiting for the increased annual volume of offering packages to be brought to market, which typically starts to happen in August and September.