As part of a blog series I am writing on the differences between the Canadian and U.S. Student Housing markets, I conducted an interview with a U.S. student housing pioneer Gary Holloway. The interview was edited for length before the blog was published. The following is the original blog with an unedited Q&A I had with Gary:
Part One – Student Housing: Solving the Mystery of the Missing Industry in Canada
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, 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 (if there is one!)
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 your involvement in student housing?
GH: In 1985 I started my own business GMH Associates. Prior to 1985 I was CFO of my Father’s family business, which had a real estate development arm and also owned various operating companies. Prior to joining my father I was in public accounting. I worked for Touche Ross in the tax department.
SL: What events sparked the idea to get into student housing? What year?
GH: When I formed GMH Associates I was focused building a real estate operating company. My first acquisition was a multifamily project in State College, PA. The asset was Parkway Plaza and it was acquired in 1985. The project was a mix of seniors and students. After operating the project I realized that the student market was underserved so I started to develop a business plan around catering to students out of this acquisition. My second asset was also in State College Pennsylvania. I later purchased an asset in Pittsburgh servicing Duquesne and then grew the portfolio heavily in the mid 1990’s.
SL: Who were the student housing players at the time and what were they doing that intrigued you? Were there developers building purpose built student housing at the time or did that come later?
GH: At the time the Student Housing market was still very much in its infancy. The players that were in the market were focused on dormitory style housing. Allen and O’Hara was probably the largest player in dormitory style housing. Northwest Mutual Life was also an early player in the space as they brought capital to the private dormitory space. Players had not yet emerged in the purpose built off campus market. The industry really started to evolve in the early 1990’s when purpose built garden style product emerged as its own product class.
SL: Did you have a good relationship with the other players in the industry / compare notes / work together in any way to enable the sector to take off?
GH: Early on in the space there were only a handful of players in the industry. I could probably count the early entrants in the space on one hand at that time. 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. From 1995 until going public in 2004 we grew the company as the GP and sourced institutional LP equity. In addition to Goldman Sachs Fidelity Investments, Berwind Property Group, RMB, and AEW all invested alongside us. Allen and O’Hara and Capstone were early entrants but we did not speak regularly in the early days. Industry collaboration did not come until the end of the 1990’s. The Dinerstein Companies got into the space in the mid 1990’s and we were extremely close. I believe we have acquired 33 assets from the Dinerstein’s over the years and our teams are still very close today.
SL: What market dynamics did you see that reinforced that there was an opportunity in student housing?
GH: In the early years in the industry there were huge spreads in student housing cap rates to conventional apartment cap rates at about 200 basis points and I saw that the risk everyone perceived in the student space was not warranting such a drastic spread. Today the spread is almost completely eroded and some would argue that in certain markets student housing trades at a premium to conventional student housing. We also saw that there was a pent up demand for quality housing at nearly every university. In our early research we determined that college enrolments were increasing at staggering rates and that the housing stock could not keep up with current enrollment projections.
SL: What were your first target markets and why?
GH: Our first target markets were the largest state systems or institutions generally with enrollments of 30,000+ students. They were the low hanging fruit at the time with the largest pent up demand so it was easy to drive to a net demand that made sense. 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: Did you buy existing product at first then move to development or both at the same time?
GH: At first we were purely aggregating product. We did do some early on major renovations to the Penn State and Duquesne assets. We started to develop from the ground up around 1998.
SL: Who were your early partners (coworkers, equity, and debt) and how did you convince them that student housing was a good idea?
GH: Already referenced equity above. Before Goldman equity was high net worth investors. Debt was largely regional banks to start many of which were consolidated and don’t exist today. GE was also an early lender as were some of the large Investment Banks. We also worked hard early in the industry to get Fannie Mae comfortable in the space. Along the way had our challenges convincing equity to come in because the product class was un-known which was why we progressed from high net worth investors to high yielding investment bank funds to more mid-market institutional funds to ultimately a publicly traded company.
SL: What were the early pit falls / mistakes 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 a 2-4 weeks. This required a 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 we could developed national relationships. Another early pitfall was missing lease up which is still a battle for many assets today. As you know in Student Housing you only have one window to fill you asset and if you miss you must wait a full 12 months in most cases to have a shot at filling the asset again. This became more of a challenge as other players entered the market and supply became more abundant. We dealt with lease up issue by tackling each market separately and keeping data on how each asset in the portfolio leased up. In the early days a lot of this data proved crucial as we had to rely on our own market research to pick up on leasing trends and patterns.
SL: What ideas did you develop that were brand new to the sector, i.e. leasing by the bed, BR to Bathroom ratios, parental guarantees etc.?
GH: I would like to think that we developed many new concepts and brought them to the sector. We would 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 a several leasing philosophy. We also adapted 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 cost on the investment in furnishings. Some of our best deals return wise were 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 and all in pricing model also was an early concept. Parents loved the idea of writing one check and not having to worry about how much their son our daughter spent on utilities or cable. We were not the first to bring bed bath parody to the industry that came later in the cycle. Most of our early developments were 4 bedroom 2 bath units as were the majority of our early acquisitions. We also had a large amount of residence hall style product in our early portfolio which had shared bathrooms and no in unit kitchens.
SL: What was the tipping point? How did this asset class take off?
GH: I believe the tipping point for us in the industry was when we proved to Goldman that there was an exit in the space with our first portfolio. When we proved this, others took notice and new capital providers started to invest in the space. Increasing liquidity at the end of the 1990’s and into the early 2000’s is ultimately what lead to Student Housing being seen as its own product class. Once this happened everything else took off from there.
SL: What are you most proud regarding your place in student housing history?
GH: I am proud of the fact that so many people and companies got their start with GMH. At or 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 than it was when you started and at your pinnacle?
GH: The industry has changed in so many ways. For starters there are countless new players in the industry and this is driven by ever increasing liquidity in the market. The new equity in the market 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 also far different than the garden style product that was built at our peak. Assets are 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. With all of these changes one thing still remains the same. The industry is about servicing our residents and their parents and in order to service our base properly you must have an outstanding staff and we pride ourselves on calling our staff family. Without this family we would not have been what were and what we are today.
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 also 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. When our pipeline of assets that we are developing deliver they will also be of the same institutional quality if not greater quality than our existing portfolio making our portfolio even more desirable.
SL: Summarize your latest activity and what your plan moving forward?
GH: We recently formed a strategic partnership with AGC out of London. AGC tailored a fund around our platform and we 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. Please visit www.gmhcp.com to learn more about their company.