PHILADELPHIA-Welcome to the Philly 411, our monthly columnon real estate happenings in the Metro area supplied with intelfrom David Jacobs, a director at Llenrock Group, alocal commercial real estate investment-banking firm. You can alsofollow their bloghere. Opinions are the author's own.

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Temple University poses a unique proposition for commercial realestate in Philadelphia. With its campus located on NorthBroad Street, an area that would otherwise be considered no man’sland for commercial real estate developers due to demographicconcerns, Temple offers an enormous amount of in-placedemand.

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

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By 2008, over 22,600 undergraduates were registered at the maincampus, and roughly half of those students were housed on or nearcampus. Currently, there is an estimated 5,000 bed shortfall ofstudent housing on campus. While there is clearly opportunity,developers face the uphill battle of acquiring real estate, gettingit zoned and approved, and most importantly, getting the projectfinanced, all without a commitment from the university. Instead ofendorsing specific projects, the university is focused ondeveloping its existing campus, as evidenced by the recentannouncement of a $1.2-billion, decade-long campaign to renovateand upgrade on campus facilities. This hasn’t stopped myriaddevelopers from commencing their visions for the slowly sprawlingcampus.

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The student housing asset class is a popular one. Collegeenrollment seems to grow each year, there is a strong need forstudents to live on campus, there is a never-ending supply of newlessees, and best of all they can get parents with good credit toco-sign the lease. For these reasons, student housing projectsaround Temple have moved along for the last several years at agingerly but progressive pace in spite of the economiccollapse.

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The skillful developer with a knack for moving along theapproval and or re-zoning process, and those with the beefiestbalance sheets (both because they can provide more equity whenneeded, and because this makes it easier to obtain debt from thebanking community) are the most likely to succeed. And timeIS important.

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Every month it seems like a developer announces their grandioseplans for a new development in the area, and all of them arecompeting against one another for that surplus of students lookingfor housing. Unless Temple dramatically increases its annualenrollment, once that surplus of students dries up, the lastdevelopers to the party will be stuck holding the bag.

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

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

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

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April, 2010 - Mosaic Development Partners haveplans for Diamond Green, a 130,000-square-foot, 260-bed studenthousing complex and additional 24 unit townhome development at10th and Diamond Streets.

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June, 2010 – Jonathan Rose Cos. and AsociacionPuertorriquenos en Marcha announced a joint venture $48-millionmixed-use development adjacent to the Temple University transitcenter, including 164 mixed-income apartments.

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

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Furthermore, there are many houses available for rent, whichprovide students more privacy, albeit less community and security.Additionally, one has to factor public support into theequation. Temple’s adjacent proximity to local communities isimportant, and if developers do not put in management teams thatare sensitive to their surroundings, there could be publicbacklash, causing headaches for both the developer and theuniversity.

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Despite these drawbacks, the love-fest for student housing atTemple rages on. It reminds me, however, of another recent housingbubble in Philadelphia. Back in 2005-06, developers rushedinto the city to snap up apartment properties that they couldeasily convert into condominiums.

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The supposed demand from suburban empty nester baby boomersfueled the rampant development. Regardless of the quality or luxuryof the project, the developers who were able to offer their productto the marketplace first did far better than those who didn’t startselling until 2008. Case in point is Crescent Heights. They bought property at 2101 Chestnut St. (formerly the Ambassadorapartment building), injected minimal capital, rebranded thebuilding River West Condominiums, offered an attractively low pricepoint, and sold over 300 units in less than two years. Theyduplicated this strategy with a student housing twist at 1326Locust Street with The Arts Condominiums. They offered cheapcondos for sale aimed at parents of University of the Arts studentsto buy for their children to live in. This offered long termappreciation, rather than flushing money down the toilet on fouryears of rent.

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Meanwhile, developers like Thomas Properties, who were late tothe game with their infamous Murano project, had to resort to anauctioneer to sell the remaining 117 unsold and over-priced luxurycondominiums in early 2009. Developers, by nature of what they dofor a living, are risk-takers. And make no mistake, speculativelydeveloping in North Philadelphia without any commitment orindication of pre-leasing is a risky proposition. The bigdifference between the current Temple student housing rush and thecondo craze from a few years back is that it is less and lesslikely that a failed project will lose other people’smoney.

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Private equity has been shying away from development deals ofall kinds unless there are massive returns (IRRs starting in thelow to mid thirties). Additionally, while student housing isa relatively attractive asset class, without commitments fromuniversities, private equity is even less likely to fund adevelopment because of opportunity cost (i.e. there are manyuniversities that WILL commit housing demand to specificprojects).

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Banks have been weary to provide debt to developments withoutsignificant (at least 75%) pre-leasing activity. Given thenature of rental developments, this is next to impossible withoutcommitments from the university itself to promise a certain numberof beds. All of that means that if a developer really wants tobuild, they are going to have to risk more personal capital, whichmore and more developers seem to have less and less of. What’s worse is that a failed development project in NorthPhiladelphia is a bit more daunting than a failed development inCenter City.

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

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