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About a year ago, the real estate investment trust American Campus Communities acquired The Vue—a 468-bed apartment complex across the street from Arizona State University in Tempe.
In a press release announcing the acquisition, CEO Bill Bayless said that the complex demonstrates "our investment criteria of differentiated products in close proximity to campus in submarkets with high barriers to entry."
The Vue was indeed a differentiated product—but not in the way Bayless wanted it to be. In the years leading up to ACC's acquisition, Arizona State students referred to the property as "Club Vue." YouTube videos circa-2010 documented the bare-chested, bare-knuckled "Vue Fight Club" events taking place in the complex's pool while hundreds of onlookers cheered "A-S-U! A-S-U!" The videos attracted more than 100,000 views.
What's more, the Vue was a recurring character in the police blotter. In one raid in 2009, 85 people were arrested. The complex's tarnished reputation was destroying its income-producing potential.
By the time ACC acquired it, occupancy had dwindled to 58 percent. A week after the deal closed, the new manager sent a letter to all its residents informing them that the jig was up, underscoring that ACC would not tolerate unlawful behavior and evictions would be swift.
Only seven "Club Vue" residents returned the next year as ACC quickly rebranded the Vue as 922 Place. In new hands, occupancy soon soared to 97 percent after ACC decided to cut rents by 12 percent.
It was the latest victory in a long run of victories for American Campus Communities—the largest and, analysts say, best managed among the three student housing REITs in the country. But this year, for the first time ever, ACC is struggling. Its shares are down 28 percent versus a decline of 3 percent for the Vanguard REIT Index ETF.
The problem: Investors are nervous about a glut of student housing and the possibility that college enrollments start to decline at the more expensive schools.
Can Bayless get his 123,000-bed, $5 billion business back on track?
(See more: Interest rates helping REITs)
Bayless has been restoring order at dorms since he was a resident advisor while studying business at West Virginia University in 1984. He co-founded ACC in 1993. "In the mid-80s you started to see the evolution of students wanting more consumer-based housing products," said Bayless, who describes himself as the "son of a poor steelworker."
"That was when I first saw the opportunity from a product evolution perspective," he added.
The product evolution Bayless saw was the rising demand for high-frills student housing to replace the barracks-style quarters that housed the baby boomers in their college years.
ACC has built, bought and operated, sometimes on-campus and sometimes off-, student housing complexes that include amenities few students will be able to afford post-college. High-end fitness centers are the company's trademark, but some of its properties also include tanning beds, theaters, basketball courts and coffee bars.
During the housing bust, ACC was one of a handful of REITs that reported same-store sales growth in occupancy, rental rates and net operating income, and few housing stocks outperformed ACC shares during those years.
This year, however, it's a different story. In July, the company reported just its second quarterly decline in same-store net operating income since its 2004 IPO. Higher-than-expected marketing costs outpaced higher-than-expected revenues, and the company announced that it expected its fall semester same-store occupancy would be between 95.5 percent and 98.5 percent—possibly lower than the 96.8 percent the company achieved in fall 2012.
(Read more: Picking real estate winners: Citi exec)
A recent Wall Street Journal piece pointed to possible problems for the company and the industry at large. Where student housing was once a niche largely ignored by major real estate developers. More than 50,000 off-campus apartments have been built so far in 2013—a record high at a time when for the first time in decades, college enrollment is slowing as the peak of the echo boom generation is now out of college.
Wounded by the housing bust, real estate developers looked for safe havens—and recession-resistant student housing, with its stable demand and parents to co-sign leases, was one of the places they poured money.
Most analysts agree that ACC is still the best operator in student housing—but the niche isn't as niche as it was. Many developers, Bayless said, have built too many units at too high price points; "We build for the masses, not the classes," he said.
ACC is "facing well-below average growth," in comparison to its past, said Dave Bragg, a managing director with Green Street Advisors, a commercial real estate firm. "Investors are adjusting their expectations."
In a recent client note, Baird Equity Research contended that "the downward spiral YTD in the student housing stocks is overdone, in our view, having been driven not by facts but by misperception that fundamentals are deteriorating."
The near-term outlook for the industry, however, seems less bright than it did a few years ago: College enrollment fell 2 percent for the 2012-13 school year, but nearly all of that decline came at community colleges and for-profit colleges, where a stronger job market lured away would-be adult students.
Bragg also said that, long term, growth in online learning could hurt demand for off-campus housing—although that hasn't happened yet. Tales about declining enrollment are beginning to make news in the higher education press but, perhaps surprisingly, the demographic shift isn't even on Bayless' radar.
"It really has not been a driver for us," he said. "At your large tier-1 public universities, there's still so much demand." Any downward shift in enrollment, he said, will likely hit expensive private colleges as price-conscious, debt-averse consumers seek lowest-cost public universities.
During the recession, he said, that trade-down helped ACC as some families talked their kids into attending affordable in-state universities while sweetening the pot with the offer of posh housing. In markets that have seen construction growing faster than enrollment, Bayless said, the occupancy hits have usually been taken by the small-time slumlords.
"The University of Texas at Austin has historically been right around 50,000 students," he said. "Enrollment has been steady; it hasn't been going up, it hasn't been going down. Over the last 12 to 15 years, 15,000 beds have been developed, but it's all been absorbed. Who has gotten pushed out of the markets? The landlords that didn't offer good service and product and value."
With only 20 percent of its properties more than a mile away from a campus, Bayless also thinks his company is insulated from overbuilding because most new developers will have to settle for inferior locations. Bayless isn't shy about serving as a pitchman for ACC—and if the company wants to get its stock back up to raise capital for more beds, he'll have to be.
On the company's most recent conference call, analysts puzzled over how the company would be able to finance development and acquisitions with such a beaten-down stock price.
Michael Zaransky, co-CEO of Northbrook, Ill.-based Prime Property Investors and the author of "Profit by Investing in Student Housing," said his company had trouble making deals lately.
"We're still buying, but we have found it difficult in the last year to find a student housing product to do a transaction at a reasonable price," he said.
One possibility is that ACC, which has historically sold very little, will attempt to divest some of its assets with weaker growth prospects to fund new construction and turnaround projects like The Vue. He won't say it outright, but it seems that Bayless' preference would be to issue more stock to expand his bet on student housing.
"Why do people invest in stock markets in general?" he asked. "Some people are looking to cut coupons, others are looking for growth. Others want something to guard against a downturn. This provides all three."
At the very least, it provides the security needed to break up fight clubs in the pool.
—By Zac Bissonnette, Special to CNBC.com.