WATCH: How niche real estate investing is getting riskier

As interest in student housing and other alternative property types continues to grow, there is reason for concern, says Harrison Street co-founder Chris Merrill.

 


Greater competition in alternative property types has its potential downsides, Harrison Street Real Estate Capital co-founder Chris Merrill says.

On the one hand, having more entrants into student housing and other alternative property types offers benefits like premiums for managers exiting assets, he notes. But at the same time, some of these new investors have been taking on added risk, which could prove challenging if the market turns.

Transcript:

It’s interesting, when we started the business focusing on education and healthcare, there was a premium in return that we could receive on these asset classes. A lot of that premium was noted because of the liquidity. Where was liquidity going to come from? Over a decade ago when we were investing in student housing and senior and medical and self-storage, there just wasn’t a great deal of liquidity. So people would say, ‘Well you’re getting a premium on these assets because who knows who is going to buy from you?’ Now we’re seeing $35-40 billion of liquidity in any given year. For us, that’s taking a lot of risk out of these asset classes. You couple that with how well they did during the downturn – they were very resilient – and now you’re seeing more entrants into the space.

We’re seeing portfolio premiums in the segment but we’re also seeing that we’re still getting a premium return in the assets, the same basis point spread as when we started, because it still is hard to access these asset classes. More competition is terrific because it’s adding more property management companies, more leasing, it’s adding more lenders, there’s more exit opportunities. They’re very big markets and having market participants is very important in order to have an effective marketplace.

What we are seeing though is people coming to the market and taking added risk because they see the benefits of these asset classes, they see how well they did in the downturn and they see the yield premium, so they want to access student and senior and medical, and the only way to do it is to enhance the risk profile. We’re seeing people take on recourse, we’re seeing people take on entitlement risk, cost overrun risk, which is fine and might clear in an up market, but if the market turns, it’s going to be very challenging for some of these folks. What we’re seeing and the thing that concerns us with the new entrants is the added risk profile they’re taking. Now for some, that can create opportunity, that can create some distress in the market. But it is fascinating, the amount of interest we’re seeing in the space now.