Student Housing

Check out our comments in the March-April edition of the Commercial and Investment Real Estate magazine.

Student Housing Makes the Grade

CCIMs seeking a multifamily niche with plenty of demand from both investors and renters need look no further than student housing. Cap rates for student housing increased 50 basis points in 2009, while the average price rose 5 percent. Both measures outperformed those for traditional apartments, according to Marcus & Millichap’s 2010 national multifamily report.

Consider the University of South Carolina campus in Columbia, S.C., where private developers have added more than 1,900 student-housing units since 2007. Despite the increase in product, occupancy remains around 97 percent, says appraiser Michael Dodds, CCIM, managing director at Integra Realty Resources in Columbia. “The university works well with developers and actively refers potential tenants to the off-campus developments.”


In 2008 alone, four complexes totaling more than 800 units sold at prices ranging from $97,000 to $152,000 per unit in Columbia. Projects include both new construction and renovations, such as Philadelphia Management’s conversion of the historic Olympia and Granby Mills into student complexes with four-bedroom units as large as 2,800 sf.


Student housing often reflects class A finishes and amenities, a characteristic that tends to place those assets out of many private investors’ price range, says LyLy Fisher, CCIM, owner of Fisher & Co. Real Estate in Austin, Texas. Prices of $30 million to $40 million for a single complex are common. Still, Fisher finds it easier to line up investors for student housing than for conventional multifamily deals. “I have a waiting list of investors who are ready, willing, and able to pursue student-housing projects,” she says.


Local banks that understand the university and market are a good source of leverage for campus-oriented multifamily projects, according to Ken Etterman, CCIM, managing principal at Redfish Advisors in Asheville, N.C. Etterman’s company recently obtained construction loans on three separate student-housing projects for a total of $45 million in financing.


Rental demand and cash flow are seldom problems in this niche, so the deciding factor on qualifying for most loans in the sector is equity. Etterman says borrowers should be prepared to plunk down 20 percent to 30 percent (actually I expressed that it would be 25 to 35% LTC and I don't agree that rental demand and cash flow are seldom problems in this niche they definitely may be problems) of the project price in cash.


Investors need educating before attempting student-housing projects. Renters today expect one bathroom per bedroom, with two-bedroom, two-bath and three-bedroom, three-bath units preferred, Etterman says. The difficulty of adding bathrooms to older, four-two units make rehabbing many properties impractical, so a rehabilitation may require teardown and replacement.


Property management also is a key to a success, experts say. “These projects are not successful if they are managed as traditional multifamily properties,” Etterman says. “They require a higher level of management and oversight, so it’s probably wise to involve a third-party manager with a focus on student housing.”

Waiting with Confidence

From the why we do what we do series…

John 11 (4-6)
But when Jesus heard about it he said, “Lazarus’s sickness will not end in death. No, it happened for the glory of God so that the Son of God will receive glory from this.” 5 So although Jesus loved Martha, Mary, and Lazarus, 6 he stayed where he was for the next two days. 7 Finally, he said to his disciples, “Let’s go back to Judea.”

Patience is a virtue only if you have a reason to believe that your patience will result in something hoped for. Those who place their trust in Jesus Christ can have confidence in knowing that God loves us, He is on the move and he will not leave us alone--though for His purposes he may have us wait on him. Waiting can be difficult and unnerving but it builds our faith and strengths our resolve. Wait, in confidence.

The Best Intentions

A recent story in the WSJ highlights how the rules have changed. The article details how a group of tenant-in-common (TIC) investors who had purchased an office building in Memphis, Tennessee for $21 million lost all of their equity investment of $7 million. The problem occurred when the loan (which had been placed on a non-recourse basis with Key Corp who latter securitized the loan but held the servicing rights) matured and the management company of the TIC was unable to identify a replacement lender. The servicer's response to the matured note was to foreclose despite the fact that the cash flow from the building continued to service the debt (though the primary tenant had vacated they continued to pay rent). The investors had bought into what at the time would have been considered a conservatively leveraged transaction at 67% LTV. However, today this conservative structure did not help them because despite a 33% equity position (which would have eroded with the market) the illiquidity in the market resulted in a total loss of the investment. Leverage is a double edged sword and engineering of the capital stack may not be as wise as once thought especially for small investors who have limited knowledge of real estate investing and the risks inherent when leverage is added to the equation.

Understanding the Risk

We recently have had the opportunity to work with investors in their due diligence of proposed real estate investment funds. Investing in a private equity or debt transaction requires an enhanced level of due diligence. Not only must the underlying real estate investment be thoroughly vetted but the ability of the sponsors and their business plan must be considered well. Assessing the risk in a transaction is critical prior to investing. Many of these business plans are non specific, for example, they propose in investing in distressed assets without much specificity with regard to product type, geography, leverage, use of funds, and other considerations. Fund organizers prefer to provide themselves with as much latitude as possible but with this latitude comes a higher degree of risk for the investor. We prefer funds that are very specific in their approach and limit their use of leverage, this of course will generally result in a lower return (lower risk-lower return). When analyzing investments such as these the assumptions of the organizers are of critical importance and the promise of a higher return always entails higher risk (always).

Glass-Steagall Redux

The proposed return of Glass-Steagall like restrictions on commercial banks was reportedly the cause of the market's decline on Thursday (WSJ article). The Obama administration says that it is not its intent to restore Glass-Steagall but its proposals come pretty close. As a student of banking and finance I don't think this is a bad idea. The repeal of Glass-Steagall was probably one of the leading causes of the financial meltdown as it removed Depression era firewalls that would have stopped or at least severely limited the collapse of the financial dominoes. The removal of the G-S restrictions also added fuel to the fire by creating an overheated and ultra-competitive financial environment where the speed increased at the turn of every lap (ultimately leading to the largest pile up of financial firms the world has ever seen). By allowing commercial banks to enter the world of propriety trading and risk taking the repeal of G-S put the equity of all of the nation's large banks at risk. Big profits are available in trading the firm's capital, so are big losses. If you don't believe me ask anyone at Bear Stearns or Lehman.

We 1031

I was asked if we work with 1031 exchange buyers. Yes. Yes, we work with 1031 exchange buyers and because we are not encumbered with listings we can focus on identifying and closing within compressed timeframes. Bring it on.

Negative Waves

Enough with the negative waves—have a little faith. This is the truth, we can't change the world, only our reaction to it. Not that the point is to ignore the realities of the current marketplace but to accept them and work hard to find opportunities and solve problems. Dig how beautiful it is out here, say something righteous and hopeful for a change.

Bobby, say it ain’t so…

Am I passionate about real estate? Eh, dirt is dirt. What I am passionate about is helping people succeed; it just so happens that my skill set is in real estate and real estate finance. I am a proud graduate of Florida State University and it was with mixed emotions that I watched the Gator Bowl on January 1^st. It was the last game that one of my heroes, Bobby Bowden, will coach. It was a great game and a great win for FSU and Bobby. What was distressing was Bobby's post game meeting in which he told a bunch of reporters that he made some bad investments in real estate. Apparently he and Ann invested in land that isn't selling "worth a crap" (Bianchi-Orlando Sentinel article). Bobby, it didn't have to be this way! This is what I am passionate about; working with our investor clients to analyze an investment opportunity, identify the risks, and where possible mitigate those risks. Eyes wide open! Land is one of the riskiest investments and in my view not suitable for investment dollars that are outside of a gambling portfolio. Help me, help you. That's what I do and that's what we do at Redfish Advisors.