The executives at Campus Apartments believe today is a great time to be both buying and selling student housing—despite rising interest rates.
In fact, Campus Apartments has carefully positioned itself to use recently rising interest rates as a competitive advantage—both when it buys student housing properties for newer real estate funds and sells properties from older real estate funds.
“We've been preparing for this,” says Daniel Bernstein, president and chief investment officer for Campus Apartments. “We think this is an amazing time for student housing. We believe there is a great risk-adjusted return based on the types of investments that we're making.”
WMRE asked Bernstein how Campus Apartments is well-positioned to handle interest rates that had to rise eventually—and are now rising through the roof.
“We actually think this is an opportunity for us to be buying—much like when we bought during COVID,” Bernstein says. “There were some folks that were a little concerned about where student housing was going. We obviously believed in the fundamentals and we bought into that market and got some really wonderful deals.”
This interview has been edited for style, length and clarity.
WMRE: How did you find those opportunities?
Daniel Bernstein: Our focus became trying to find off market deals where we could see the relative value and take advantage of a market that is still kind of coming out of the pandemic.
WMRE: Is that relative value opportunity still there, or do you feel that that window is closed or closing
Daniel Bernstein: We believe it's still there. Though you're still seeing some cap rate compression, relative to multifamily there's still a lot of yield.
Also, changes in the interest rates have sidelined or paused some folks who might be more reliant on their debt strategy or their use of leverage. We may be able to find some other opportunities because we're okay buying with lower leverage.
WMRE: Are you also selling properties?
Daniel Bernstein: On the sales side so we're selling much more than normal but that's just based on the life cycle—a different fund is nearing the end of a life cycle. So, we are in the disposition mode and in acquisition mode at the same time harvesting assets out of one of our legacy funds
Over the last few years, the sales have been done in such a way that what will be left with were the developments that we built which are uber-core, very coveted properties which typically will trade to lower leverage buyers. We did that on purpose, because we saw what was shifting in the capital markets with interest rates.
WMRE: My understanding is that your firm has done a lot of development. How is the outlook for this year?
Daniel Bernstein: Development is certainly slowed based on the cost of construction. In our current fund we will probably wind up being lighter on development and heavier on the value add and core plus acquisitions because that's what that's what the field is giving us.
Our fund complexion typically targets about 40 percent value add type assets or acquisitions, 30 percent core plus acquisitions and about 30 percent development. We think this is a good balance because it diversifies the risk profile and offers a great kind of balanced return.
Most importantly it allows us not to be a “one trick pony” because it affords us an opportunity to enter markets in different ways.
We have a skill set that I think allows us to access markets in different times and not just be reliant on either having to do core acquisitions or development. We've been in business for so long, we fought through some of these inflection points.
WMRE: So if the cost of lumber suddenly goes down or the price of the site changes, can you shift from one kind of investing to another.
Daniel Bernstein: On the question of pivoting: absolutely. That's how we're built.
WMRE: How are equity investments in Campus Apartments structured?
Daniel Bernstein: The original source the capital was partners’ capital. Our founders started many years ago cobbling together properties and created a wonderful base. We still maintain large portfolios that we own without investors.
We pivoted several years ago to accepting outside investors first with a single capital source like sovereign wealth funds and then later to a more typical fund structure where we are now. We have both where we have large institutional type investors such as pension plans, endowments, sovereign wealth funds, insurance companies—but also family offices and individual investors. Typically speaking from a return side we target you know roughly 6 percent and the balance of our return is this generated on the on the exit.
Any capital that we've ever taken on has been fully-discretionary capital. So, we've never had to ask permission or get permission to make any investment, purchase or financing decision. However, we've always operated in a very transparent manner. Part of our history has been public private partnerships with universities, so we understand the complexities of the reporting.
I feel like I think we went above and beyond from a transparency standpoint and always kept them in the loop and apprised beyond the required reporting
WMRE: What does that look like? Is it a phone call? Is it a massive excel spreadsheet?
Daniel Bernstein: It's all of the above. We are very fortunate to have great relationships with really well-heeled, experienced limited partners who have great perspective. We'd be foolish not to listen. We have regular check-ins with some of our larger LPs that are just impromptu, beyond the normal reporting requirements or annual meetings.
