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FORT WORTH-Anyone with a modicum of commercial real estate knowledge has heard of student housing and what a wonderful sector it is. Exploding college enrollment combined with supply constraints has combined to make the student housing sector a popular one in which to buy and sell.
Student housing experts tell GlobeSt.com that there is reality to the hype. But these experts also point out potential pitfalls to the unwary buyer, seller or owner of any kind of student housing.
One issue to consider is that of financing. On the one hand, there is a lot of capital out there looking for investments and to some lenders, student housing is the ideal place to park that capital. ”Acquisition financing is readily available within the student housing sector,” comments Peter Katz, senior vice president of investments for Institutional Property Advisors‘ Phoenix office. But, he continues, it isn’t quite so readily available unless you’re a seasoned investor or you “have a national platform management company handling the asset.”
“Lenders are very aware of how management-intensive and operation-intensive a business student housing is,” says Dorothy Jackman, managing director of Colliers International‘s National Student Housing Group in Clearwater, FL. “You won’t get a favorable loan, unless you have strong experience or a strong operating partner.”
Adds James Tramuto, executive vice president, capital markets with Jones Lang LaSalle‘s Houston office: “This is absolutely a niche business. You have to run it completely differently and lenders are sensitive to the level of owner experience.”
Jackman also points out the various ways in which student housing is vastly different from multifamily housing, not the least of which are different leasing parameters, the ability to match roommates, forecast and even maintaining furniture. “Good operators have to educate students and parents about legal issues and what’s expected of them,” she adds. These reasons – and more – explain why owners in the sector need to either be experienced or need to hire an experienced student housing operator to succeed.
Nor is success predicated on having that student housing project right next door to the main campus. According to Katz, the two major industry focal points have involved flight to quality, core, infill, newer assets, as well as what Katz dubs the “value-add, vintage assets further from campus that have maturing loans.” In either case, he explains, investors – seasoned investors – can benefit from very low fixed-rate debt and experience a 250-300 basis point differential between the loan constant and a potential acquisition’s “going in” cap rate.
When it comes to the further out, value-add asset with the maturing loan, it helps to keep in mind the axiom in student housing that no two locations are alike. In some areas, students don’t care how far out they are: They simply want to save money on rent. In others, however, being as close to campus as possible is a must.
In comparing two rival universities, Texas A&M University in College Station, TX and University of Texas in Austin, Tramuto says the former offers incredible on-campus parking and wide roads through campus that are ideal for cars. And as most kids who attend A&M have cars, “being adjacent to campus in College Station doesn’t mean a whole lot,” Tramuto says. In fact, the owner/operator might do better investing in the farther-from-campus value-add property where students are happy to pay less rent and where operational and capital improvements can provide a stronger NOI to that investor.
However, the opposite is true when it comes to University of Texas-Austin. No one drives on campus – the roads aren’t very conducive to it, and parking is a nightmare. “You’ll pay more, as a student, to be next to campus so you can walk or ride a bike,” he remarks. In this case, the investor who has that two-mile-away-from-campus-value-add asset isn’t going to see a whole lot of takers.
This example points to one very important caveat when it comes to owning and operating student housing: There is no such thing as a blanket statement or assumption. No two locations are alike. At all.
And this is the same, whether someone wants to buy or sell a student housing property. There is one blanket aspect on which the experts agree, however: Trotting out a property for sale anytime from January of a school year through the summer, before fall lease-up, is probably not the best idea in the world. “No one is going to take a building to market now,” Jackman comments. “They’ll go through lease-up and hand over the keys afterward, and let the new owner kick off the leasing season and managing the property right away.”
There are even a few exceptions to this rule, however. Jackman says a seller could possibly sell a property based on future income, but to do so, that seller had better be very aware of what the school is doing and the dynamics of the market before trying something so risky.
With that in mind, the experts say more student housing will hit the market during the latter part of Q3 and into the early part of Q4. Expect an active time of it, too.
“The combination of low fixed-rate debt, high demand from allocated capital and strong sector fundamentals in pre-leasing and achieving rent growth will all contribute to a record year in transactional activity that approaches $2.5 billion to $3.5 billion,” Katz predicts.