PHILADELPHIA-Welcome to the Philly 411, our monthly column on real estate happenings in the Metro area supplied with intel from David Jacobs, a director at Llenrock Group, a local commercial real estate investment-banking firm. You can also follow their blog here. Opinions are the author's own.

Temple University poses a unique proposition for commercial real estate in Philadelphia.  With its campus located on North Broad Street, an area that would otherwise be considered no man’s land for commercial real estate developers due to demographic concerns, Temple offers an enormous amount of in-place demand. 

Student applications rose sharply in 2000, with many students citing the big-city atmosphere as a draw. The university had a 60% jump in enrollment in the last decade. But the sudden growth spurt forced the university to declare in 2004 that it no longer could provide on-campus housing for students after the first two years. That sent private developers scrambling to build or rehab nearby properties, both east and west of Broad Street, but such overzealousness could be dangerous.

By 2008, over 22,600 undergraduates were registered at the main campus, and roughly half of those students were housed on or near campus. Currently, there is an estimated 5,000 bed shortfall of student housing on campus. While there is clearly opportunity, developers face the uphill battle of acquiring real estate, getting it zoned and approved, and most importantly, getting the project financed, all without a commitment from the university. Instead of endorsing specific projects, the university is focused on developing its existing campus, as evidenced by the recent announcement of a $1.2-billion, decade-long campaign to renovate and upgrade on campus facilities. This hasn’t stopped myriad developers from commencing their visions for the slowly sprawling campus.

The student housing asset class is a popular one. College enrollment seems to grow each year, there is a strong need for students to live on campus, there is a never-ending supply of new lessees, and best of all they can get parents with good credit to co-sign the lease. For these reasons, student housing projects around Temple have moved along for the last several years at a gingerly but progressive pace in spite of the economic collapse. 

The skillful developer with a knack for moving along the approval and or re-zoning process, and those with the beefiest balance sheets (both because they can provide more equity when needed, and because this makes it easier to obtain debt from the banking community) are the most likely to succeed.  And time IS important. 

Every month it seems like a developer announces their grandiose plans for a new development in the area, and all of them are competing against one another for that surplus of students looking for housing.  Unless Temple dramatically increases its annual enrollment, once that surplus of students dries up, the last developers to the party will be stuck holding the bag.

Let’s take a look at some of the larger projects that have been announced recently:

March, 2009 – Tower Development gained approval to develop a 14-story, 1,100-bed, 300-unit student housing tower behind developer Bart Blatstein’s Avenue North complex.

June, 2009 - City Council preliminarily approves Goldenberg Group’s plan for a $250-million, 800-unit, 1,200 bed, 14-story tower at 12^TH Street and Cecil B. Moore Avenue.

April, 2010 - Mosaic Development Partners have plans for Diamond Green, a 130,000-square-foot, 260-bed student housing complex and additional 24 unit townhome development at 10^th and Diamond Streets.

June, 2010 – Jonathan Rose Cos. and Asociacion Puertorriquenos en Marcha announced a joint venture $48-million mixed-use development adjacent to the Temple University transit center, including 164 mixed-income apartments.

There are also other mid-scale (and currently stalled) projects, as well as dozens of smaller-scale developments being planned on smaller parcels in and around Temple’s campus, including modular pre-fabricated projects. Despite the fact that cumulatively, these developments still fall short of the demand for on-campus beds, there are other significant factors to take into account for a developer.  In a student poll, “experiencing city life” was cited as the primary reason for requesting on-campus housing. So why live on North Broad Street when you could actually live in Center City and take a quick bus ride to campus?

Furthermore, there are many houses available for rent, which provide students more privacy, albeit less community and security. Additionally, one has to factor public support into the equation.  Temple’s adjacent proximity to local communities is important, and if developers do not put in management teams that are sensitive to their surroundings, there could be public backlash, causing headaches for both the developer and the university.

Despite these drawbacks, the love-fest for student housing at Temple rages on. It reminds me, however, of another recent housing bubble in Philadelphia.  Back in 2005-06, developers rushed into the city to snap up apartment properties that they could easily convert into condominiums. 

The supposed demand from suburban empty nester baby boomers fueled the rampant development. Regardless of the quality or luxury of the project, the developers who were able to offer their product to the marketplace first did far better than those who didn’t start selling until 2008.  Case in point is Crescent Heights.  They bought property at 2101 Chestnut St. (formerly the Ambassador apartment building), injected minimal capital, rebranded the building River West Condominiums, offered an attractively low price point, and sold over 300 units in less than two years.  They duplicated this strategy with a student housing twist at 1326 Locust Street with The Arts Condominiums.  They offered cheap condos for sale aimed at parents of University of the Arts students to buy for their children to live in.  This offered long term appreciation, rather than flushing money down the toilet on four years of rent.

Meanwhile, developers like Thomas Properties, who were late to the game with their infamous Murano project, had to resort to an auctioneer to sell the remaining 117 unsold and over-priced luxury condominiums in early 2009. Developers, by nature of what they do for a living, are risk-takers. And make no mistake, speculatively developing in North Philadelphia without any commitment or indication of pre-leasing is a risky proposition.  The big difference between the current Temple student housing rush and the condo craze from a few years back is that it is less and less likely that a failed project will lose other people’s money. 

Private equity has been shying away from development deals of all kinds unless there are massive returns (IRRs starting in the low to mid thirties).  Additionally, while student housing is a relatively attractive asset class, without commitments from universities, private equity is even less likely to fund a development because of opportunity cost (i.e. there are many universities that WILL commit housing demand to specific projects).

Banks have been weary to provide debt to developments without significant (at least 75%) pre-leasing activity.  Given the nature of rental developments, this is next to impossible without commitments from the university itself to promise a certain number of beds. All of that means that if a developer really wants to build, they are going to have to risk more personal capital, which more and more developers seem to have less and less of.  What’s worse is that a failed development project in North Philadelphia is a bit more daunting than a failed development in Center City.

As is the question with all speculative development projects, developers really must look themselves in the mirror, and ask, “If you build it, will they come?”