By Sara S. Patterson
As off-campus housing changes communities, asset-rich investors vie for the best properties.
Published in the May/June 2016 issue of Commercial Investment Real Estate magazine published by CCIM Institute
International and affluent students are pushing the envelope on amenity-rich housing on college campuses, helping to transform communities across the U.S. and Canada. While the funding for leasing students' one bedroom-one bath accommodations usually comes from wealthy parents, increasingly private equity funds, institutional investors, and real estate investment trusts fund these developments. Their interest is upping the property prices and the volume of deals while driving down capitalization rates.
And some of the big players are taking profits and moving on. For example, InvenTrust Properties in Oakbrook, Ill., recently sold its University House portfolio of nearly 13,000 beds, for $1.4 billion to a joint venture of the Scion Group in Chicago, the Canadian Pension Plan Investment Board, and GIC, Singapore's sovereign wealth fund. This sale reflects the ongoing evolution of student housing from a disparate industry populated with mom-and-pop investors into one dominated by commercial real estate heavy hitters.
Yet this property niche still provides opportunities for CCIM brokers, developers, and investors located near college towns.
“This is Manhattan-style living for students,” says Rene Nelson, CCIM, real estate investment broker at Pacwest Commercial Real Estate in Eugene, Ore. “I would live there amid 10,000 amenities.”
Nelson facilitated a land purchase transformation with Core Campus near the University of Oregon in Eugene to build a 12-story, 508-bed student housing complex called the Hub, which opened in 2015.
“This student housing project has spurred local growth and new development,” she says. “When I was making the deal with the buyers, we met with several key business decision makers and adjacent land owners. One owner said that he had been waiting for a development like ours to launch, so he could justify his efforts to start a revitalization of the area for the properties he owns.”
In some cases, universities have become involved in building off-campus student housing through private/public partnerships to accommodate the growth of their student populations. In Waterloo, Ontario, two well-regarded universities - the University of Waterloo and Wilfrid Laurier University - have evolved from a lodging program focused on safety for students in the early 2000s to a mixed use of retail and resort-like student housing buildings in the last five years.
As a land-locked campus, Wilfrid Laurier has actively participated in local real estate through land assemblies, single lot purchases, and development of a portfolio of off-campus housing. With a larger campus footprint, University of Waterloo has been actively engaged in leasing student housing.
“In Waterloo, investors have a full spectrum of student housing,” says Mike Milovick, CCIM, BBA, broker at Royal LePage Grand Valley Realty in Waterloo. “My role is to work with different types of investors. Since 2003, I've seen the landscape of student housing change from primarily mom-and-pop ventures to substantial interest from REITs and institutional investors in the upscale mixed-use student accommodations.”
During this transformation, he has facilitated replacing older homes built from 1910 to 1960 with both utilitarian and high-rise mixed-use buildings for students. The closer the properties are to the campuses, the higher the rents charged and the more amenities offered, according to Milovick.
“Waterloo has more purpose-built student housing than the rest of Canada combined,” he says.
During the last 15 years, substantial boosts in enrollment at both universities, especially from international countries and out-of-province students, have driven both the expansion in student housing and the desire for improved amenities.
“I continually monitor enrollment for signals on how the proceeding rental season will occur,” says Milovick, who is the landlord of a student housing property. Right now, he sees the best balance in student accommodations in the last 15 years, with price per unit ranging from CA$49,000 for a low-end residential conversion to CA$80,000 for new purpose-built housing.
During the Great Recession, enrollment in most U.S. universities, including graduate schools, skyrocketed, serving as a safety net until the job market stabilized. During the past decade in Fayetteville, Ark., the University of Arkansas's “Campaign for the 21st Century” further accelerated the student population explosion from 10,000 to 27,000, prompting an urgent demand for student housing.
Local Fortune 500 companies, such as Walmart and Tyson Chicken, jumpstarted the campaign to improve the quality of life to attract and retain employees in Fayetteville. The $1 billion raised “changed the landscape in Fayetteville across the board,” says Clinton Bennett, CCIM, vice president at CBRE Brokerage in Fayetteville. “The success of the University [of Arkansas] has resulted in a tremendous amount of student housing development in areas that are in close proximity to its campus. Now we are beginning to see a significant increase in the efforts of retail developers in those same areas.”
Bennett reports more than 2,000 student-specific multifamily units have been built in the last four years and an additional 1,000 units are on the drawing board or under construction. While the University of Arkansas has not been an active player in the leasing or investment markets, the campus footprint has spread, creating more land scarcity close to campus and leading to higher property costs.
Student Housing Stats
“Due to the growth of students and their housing needs, the recession hardly affected northwest Arkansas and our business stayed strong, with a large number of transactions,” Bennett says.
Another thriving campus is University of North Carolina in Charlotte, N.C., where prices have accelerated rapidly since 2013 and multifamily high-rises are booming, according to Karen Mankowski, CCIM. She sold prime land close to UNC for student housing in 2013.
The city's light rail train extension to the university's campus expected by fourth quarter 2017 has spurred a land and building frenzy. Developers and investors are vying rigorously for new development and renovation of properties, including mixed-use luxury student housing and retail, close to the light rail extension.
“College students here have preferences similar to millennials, such as gravitating toward urban centers, preferring amenity-rich rentals, and ditching cars in favor of walking, biking, and public transportation,” says Mankowski, associate director at Newmark Grubb Knight Frank in Charlotte.
Partners With Deep Pockets
Will Kreuzer, CCIM, successfully completed retail developments for students at University of Illinois, Illinois State University, and Indiana University. When his small firm dabbled in mixed-use retail and student housing at Indiana University in 2005, he realized that his company needed a development partner with deeper pockets and student housing management experience to be successful in this arena.
“Now a partner and I identify where we can build mixed-use retail and student housing projects and then we bring in CA Ventures, which manages real estate projects nationwide and has invested $1 billion in student housing,” says Kreuzer, a principal of Tartan Realty Group in Chicago. “The growth and stature of the university correlates to its ability to demand higher year-over-year rent growth.”
He sees opportunities for the mixed-use retail and student housing as being especially strong on urban campuses, which are not as affected by ebbs and flows of student departures for breaks and vacations.
“Student housing is a niche that our firm in partnership with CA Ventures really targets to kids coming from higher household incomes who want amenities and security,” Kreuzer says. “The opportunity is there, and we have figured it out on a few campuses. For the Midwest universities where we have combined student housing with retail, the keys are bed to bathroom parity, developing a safe and secure environment, great WiFi, and study rooms on each floor.”
In Huntsville, Texas, Sam Houston State University has seen a steady 3 percent growth in enrollment due to more academic programs that attract larger numbers of freshman students. While SHSU has a $70 million 800-bed student housing project underway, as well as private development of similar student housing, the college population is expanding faster than new housing development. Also, the land availability close to campus is limited, according to Jon Montoya, CCIM, associate broker at MariRealty.com in Huntsville.
“Still there's a great opportunity for outside investors to buy land and develop student housing,” says Montoya, who originally moved to Huntsville to retire and left retirement to work with many people involved with SHSU in brokerage and development.
While still a niche of multifamily housing, off-campus student housing has come into its own as a top investment choice for institutional investors, REITs, and private equity funds. As long as U.S. and Canadian universities continue to draw more students, especially those from international countries, this sector should thrive and provide multiple opportunities for CCIMs to close transactions, build developments, and work with investors or invest themselves.
Sturdy Investment Trend
While every university campus and each student population has specific nuances, nationwide, luxury student housing in rural and urban settings has become a top investment for the institutional asset class, according to Jaclyn Fitts, national director of student housing at CBRE in Dallas.
“We see universities and developers buying older homes close to campus, tearing them down, and building new pedestrian-oriented, amenity-rich student housing,” Fitts says.
Real estate investment trusts and other large investors are adamant about investing only in student housing close to campuses in the last few years, according to Fitts. There’s 100 basis point difference in capitalization rates between student housing that’s farther from campus and walkable student housing.
Overall, universities in the U.S. are growing because of the large millennial generation, more students attending college, and the rise in international students. “The beauty of international students is that they like furnished apartments and have been the primary drivers for amenity-driven student housing,” she says.
The investment appetite for student housing grew from $3.6 billion in 2014 to $5 billion 2015. The average cost per unit was $135,800 in 2014 versus $158,300 in 2015. The jump in student housing investment compares to a smaller increase of $34.8 billion in 2014 to $49.1 billion in the highly touted multifamily marketplace, according to Byron Moger, executive director of multifamily business development and client services for Cushman & Wakefield in Tampa, Fla.
“Even though student housing is only about 10 percent of multifamily marketplace, it has become much more powerful in the last five years,” Moger says. “The price and amenities for off-campus student housing have risen significantly.”
Overall, it’s a great market for investors, he says. For the variations from one university to the next, commercial real estate professionals have to consider the number of students, if that number is increasing year over year, how many students need off-campus housing, and what off-campus student housing is available.
“Especially in urban centers, many students still look for housing in the general rental market,” Moger says. “The solution is not to offer the same amenities and to focus on including high-speed Internet and many opportunities for social interactions among the students. In most markets, there’s plenty of demand.”