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ORLANDO-The commercial real estate industry’s newest development niche for the next 10 years is going to be off-campus housing, developers, brokers and lenders tell GlobeSt.com.

Booming university/college enrollments nationally and locally are triggering a need for class A shelter projects that have been producing average returns on costs of 10% to 20%. Buyers look for capitalization rates in the 9% to 10% range. Profits are there for the right project and the right investor/developer

For example, University of Central Florida (35,000 students) is building 1,600 beds on campus with 800 already delivered for the 2002-2003 school year. Off-campus housing is averaging 97% occupancy, except for Knight’s Krossing properties which UCF took over. Vacancies at Knight’s Krossing are over 25%.

In Tallahassee, occupancy at Florida State University’s on-campus student housing have been at or near 100% for the past eight years, notes Standard & Poor’s Corp., the New York-based bond-rating company. “There is a very strong demand for on-campus housing” at FSU and “the expectation of continued solid demand” over the next five years at least, the S&P analysis notes.

Standard & Poor this week gave a single A-plus rating to Florida State Board of Education’s $25.5 million housing facility revenue bonds, series 2001A issued for Florida State University.

“It’s a great business for the right investor but it is not a good investment for an absentee owner, unless he or she has an excellent management team” on site, Paul M. Guyet, a vice president at Orlando-based Smith Equities Corp., one of the largest campus housing brokers in the nation, tells GlobeSt.com.

The reason: Expenses. They are “double what an A quality apartment would have and there is more damage which results in higher insurance costs,” says Guyet who has brokered $50 million in student housing this year alone in the Orlando market.

Regardless of expenses, the profit window is obvious, illustrated by two recent deals Guyet closed. Development costs at both properties were an estimated $90,000 per apartment. He sold The Village at Alafaya Club Apartments for $25.48 million. The complex has 228 apartments and 840 bedrooms. The sale price equates to $111,732 per apartment and $30,327 per bedroom.

Guyet also sold College Suites at Science Drive (198 apartments and 732 bedrooms) for $23.3 million or $121,354 per apartment and $31,830 per bedroom. The buyer of both properties was American Campus Communities of Austin, TX. It’s easy to see, Guyet tells GlobeSt.com, “those sales can produce nice profits when the properties are sold.”

But those sort of profits may not be as large on every project. “Keep in mind that Orlando is one of the unique markets in the country,” says Guyet, a former New York City broker with 25 years in the industry.

Product saturation is another element that will reduce profits, Guyet says. “In many college/university towns, too many apartments have been built and in those town, it is very difficult to sell college housing.”

Buyers of college housing who buy the properties based on cash flow want to make from 9.25% to over 10% on their investment before leveraging the purchase,” Guyet tells GlobeSt.com. They typically shoot for a 9.5% capitalization rate.

Deluxe living and off-campus rents range from $375 per month without furniture to about $500 per month furnished for three and four-bedroom units. One and two-bedroom units will rent for more.

Rents usually include uitilities, cable TV and local phone service. Long-distance phone is the student’s responsibility. “Some places charge for Ethernet and most, if not all, required parental guarantees of lease payments,” Guyet says.

Among the most active developers of off-campus housing are JPI, Irving, TX; GMH, Newtown Square, PA; American Campus Communities, Austin, TX; Allen & O’Hara, Memphis, TN; Capstone, Birmingham, AL; Fairfield Properties, Grand Prairie, TX; and FirstWorthing, Dallas.

“Some of these companies will also build on-campus without the college/university having to use its own money,” Guyet says. “They finance the entire deal with their own credit.”

From a lender’s perspective, Orlando remains “a hot (campus housing) market with the growth of the University of Central Florida (35,000 students), but land is in limited supply,” Todd Cohen, vice president, Primary Capital Advisors, tells GlobeSt.com.

Hard construction costs can range from $50,000 to $60,000 per unit, depending on bathrooms and amenities, plus land acquisition, site development expenses and financing costs. “These can vary considerable and bring total costs to over $80,000 per unit and over $30,000 per bedroom,” Cohen says.

Hard costs per bedroom can range from $20,000 to $30,000 per bedroom for a typical deal. The projects generally sell for over $100,000 per unit–making the profit factor obvious, Cohen says.

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