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.”
