A Tale of Headwinds and Tailwinds in PBSA/PBSH in U.S., Canada and Europe: 4 Questions with Woodbourne’s Ian Husted  

Woodbourne Capital Management International LP's Vice President – Investments, Ian Husted, recently shared insight with The SHURE Initiative about the state of the capital markets and overall tenant demand. Husted describes a challenging capital markets arena on the investment side of the game but said Woodbourne has been able to execute recent deals. On the contrary, Husted describes the leasing side of the business as robust with very low vacancies.

Ian Husted joined Woodbourne in 2014. He serves as a real estate investment team vice president, focusing on underwriting and structuring student housing and apartment transactions. He also leads Woodbourne's student housing asset management team and oversees the strategic operations of this portfolio.

SHURE: Describe the climate in student housing/student accommodation as you see it today.

IH: If we look at the last 6 to 12 months, it's a tale of headwinds and tailwinds. Starting with our headwinds, we have some significant changes that have occurred. Costs on the development side are escalating rapidly and have escalated meaningfully over the last 12 months. We've seen a 75 basis point move in the long end of the yield curve, which has wholly reset all our financing expectations and costs across every asset class. However, within the student housing space, that has had a pretty material impact on how we finance assets.

Regarding the tailwinds, we're still experiencing high single-digit rent growth across almost every market active in Canada. The recent removal of GST and HST was announced by the federal and provincial governments here in Ontario.

When you combine all those things together, I would look at how the market is still digesting all the factors that will impact investment activity across the space. We've seen very little transaction activity because all these factors came together simultaneously. The market needs to digest what's going to happen next.

SHURE: Describe demand and rental growth in your portfolio.

IH: Occupancies are flat yearly, with very low vacancies across all the markets. We're, maybe, leasing up a week or two earlier this past cycle than the prior cycle with an earlier level of inquiry than the preceding year.

By and large, across our portfolio, there is relatively strong rent growth.

SHURE: Are you looking to work with international investors?

IH: I would break it into two categories when talking to international investors. We have U.S. investors and European investors whom we speak to regularly. The conversations are different. U.S. investors are focused on headline numbers and more focus in my mind on unlevered yields and the initial benchmark. And then, if you hit it, they want to avoid getting into as many of the details.

With European investors, there are many more similarities to how some of the capital markets work in Canada, such as generally lower yields and generally lower unlevered returns. It's a challenging capital-raising environment, but we've had some reasonable success raising funds across various platforms this year.

SHURE: Could you elaborate on your experience in the capital markets environment today?

IH: It's just a risk conversation. Investing in debt looks pretty attractive on a risk-adjusted basis relative to equity because you've got some security with an opportunity to be in a secure position.

What we play in most is the middle space, and when you start talking about total returns that make sense from the perspective of adjustment off of the risk-free rate, you're getting into low double digits. Those are attractive returns on a risk-adjusted basis with a reasonable sponsor and good coverage.

Compare that to the equity options, and you're probably not that far off of that, so spread that equity or call it the 'risk premium'—that has just tightened pretty dramatically as you push up the risk-free rate.

That pattern is occurring and is not specific to student housing. It's broadly what's happening in the overall capital markets, and that's where this lockup comes from because it's pretty hard to buy an asset at a five-cap when your first mortgage is five, your second options are 10 to 12, and your equity wants 20.

Those deals don't make much sense anymore, so we've seen everything lock up. However, on a risk-adjusted basis, there are opportunities in the student housing space, and we've executed a couple of them—they're certainly interesting.

We have an appetite to do that kind of deal if possible, but it's a small space with few opportunities. It goes back to who your capital is. The only way you can rationalize the equity returns you'll get in the student housing space is by looking at it on a filter-core basis. You believe in the next 10 to 15 years and what the macro story looks like, and you want that asset in a decade from now. However, if you're a merchant builder or have a finite amount of capital put to work, You're looking to maximize the return over the next 4 to 5 years. It's tough to rationalize equity over debt right now.

How do you do the deal right now?  That's why it's about having the right capital in this space.

Related SHURE Initiative Event: SHURE: VANCOUVER & WESTERN CANADA | March 26-27, 2024 Simon Fraser University, Burnaby, British Columbia