Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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THE FUTURE OF STUDENT HOUSING? lion, according to RCA. Los Angeles-based Kayne Anderson and Memphis, Tenn.-based Education Realty Trust rounded out the top three buyers during that period, with $442.1 million for 16 properties and $260.1 million for 10 acquisitions, respectively. Boston-based Fidelity Investments topped the list of sellers, disposing of 18 proper- ties for $383.3 million. With all the competition in the acquisition world, development has become very attractive. Even merchant builders, which have been out of the game since 2006, are slowly coming back. What's the Attraction? Student housing fared well through the recession, mainly because the tenant base did not change — enrollments do not drop during recessions. Debt from Fannie Mae and Freddie Mac remained con- stant. Conventional multifamily, which can be a signifi cant shadow market, benefi ted from the demise of the single-family market. A few properties have gone back to the bank primarily because of overleveraged loans maturing, similar to what has occurred in other real estate sectors. Construction has blossomed in the past few years with plenty of banks willing to provide loans and plenty of buyers looking for prod- uct. T e Preiss Co. recently received 25 off ers from well-known opera- tors and funds for a student-housing asset in Raleigh, N.C. Two rounds of best and fi nal off ers resulted in a higher sales price than expected at a 7.5 percent capitalization rate. If an unattractive loan hadn't had to be assumed, the asset would have traded at a 6.7 percent cap rate. T e increased buyer pool has pushed down cap rates and generated more interest in building new product as opposed to acquiring existing product. Depending on market, proximity to campus, and product age, cap rates generally range from 6.2 percent to 7.5 percent. According to RCA, the average cap rate for 1Q12 (through February) was 7.2 percent. Student-housing cap rates fell by 53 basis points during 2011, compared with a 29 bps decrease in conventional multifamily cap rates. However, student-housing cap rates are about 75 bps higher than conventional multifamily rates. T e cap rate premium is due to the business risk of running student housing. If owners miss lease-up in August they are done until next year, as opposed to conventional multifamily, where owners see constant move-outs and backfi ll. Like- wise, if a new student-housing development is not ready by August, it is dead in the water. Delivery on time is absolutely paramount. Land close to universities has become scarce, causing developers to venture further from campus or redevelop existing product nearby. Land value, which is backed into by taking construction costs and rents into consideration, varies based on proximity. T e Preiss Co. has a project in Raleigh where the high-density land near the school is valued at $2 million per acre. Lower-density locations a few miles from a school might be valued around $150,000 an acre. Some redevelopments have gone urban with concrete and steel con- struction, structured parking, and even a mixed-use component such as fi rst-fl oor retail. T e West Campus area in Austin, Texas, has seen several such redevelopments, garnering rents up to $1,000 per bed. On the low end, the average rent is around $350 per bed. T e sector has a 45 percent expense ratio to income, which is much higher than CCIM.com The University of Kentucky became one of the fi rst universities to turn over its entire student-housing operations to a private real estate company, Education Realty Trust, according to the Wall Street Journal. EDR will assume management of the university's 6,000-bed dormitories on July 1, and the company signed a 50-year ground lease with the university to build and operate a 600-unit, $25 million on-campus student-housing community. In addition, EDR will redevelop and expand the school's current on-campus dorms over the next seven years to 10 years, adding about 3,000 additional units on school land, funded through private fi nancing. The project, which will eventually replace the school's 44-year-old inadequate student housing, may be worth as much as $500 million upon completion. EDR is a publicly traded real estate investment trust that owns or manages 60 student-housing developments in 23 states. — CIRE staff STUDENT HOUSING BUYERS 7% 10% 0% 29% 17% 43% 0% Cross-Border 55% 28% Public Listed/REITs 12% Private 18% 32% 29% 11% 3% 2009 2010 Source: Real Capital Analytics 2011 0% 1Q12 24% 74% User/Other Institutional 9% 0% May | June | 2012 23