Head of the class

A growing number of multifamily owners, operators, managers and even institutional investors view student housing as an opportunity to capture that next big demographic, the 65 million strong wave of echo boomers, who will dominate the traditional rental market after graduation from college.

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Today, student housing is a bright spot in an otherwise gray multihousing landscape. It is one of the fastest growing asset classes and boasts the highest market-driven net operating income. While development starts of student housing properties slowed and property sales fell off dramatically in the economic downturn, along with every other real estate asset class, rents and occupancy across student housing properties have held their own.

The reasons are many. First, student housing is not dependent on job creation and, second, students typically don’t have jobs to lose. Their parents pay the rent, or it is subsidized through aid and grants. And, for the operator and investor, the student housing business offers a number of ancillary profit centers, including fees, laundry, vending machines, utility recapture, green tax credits and more.

Most compelling is the fact that college enrollment actually rises during recessionary times. “The economy is knowledge-based, so to anticipate getting a decent job, you must apply yourself to college more so now then ever before. So, there is a higher concentration of kids who are going to school and anticipating school. We see by the enrollments that many more state universities need to expand. It’s not just the big universities, now it’s the tertiary markets that have been growing and they have a need for additional housing in far-flung areas,” said Rick Jones, regional vice president of Atlanta-based Lane Company, which recently created a division dedicated solely to student housing management.

According to the American Association of Community Colleges, higher education enrollments increased 17 percent from 2007 to 2009 and nationwide enrollment during the 2009-2010 academic year was the highest in the history of the country. The National Center for Education Statistics projects 18.2 million students will be enrolled in colleges and universities by 2013, compared to 16.4 million in 2003.

Players new and old
Those fundamentals have spurred creation of a couple of REITs dedicated to the sector and even attracted new players from other industries. Take Kevin Bradt, a division president for Silver Spring, Md.-based Choice Hotels International, Inc. for 13 years. Early this year, Bradt announced the formation of what he’s calling the first student housing franchise brand, CampusBrands, Inc. His plan is to provide developers with repositioning strategies for their under performing hotels. The Atlanta-based company has formed a strategic alliance with NYLO Hotels, a loft-style boutique hotel firm, which will provide design expertise, new-construction prototypes and guidelines for premium-class conversions of hotels into off-campus student housing communities and upgrades of existing student housing communities worldwide.

“For owners with multiple properties in a single market, our strategy to reposition the under performing property to a new asset class has two benefits. First is to help rectify that under performing property’s performance and second is to boost occupancy for the remaining hotels by shifting the demand base. In many college towns, hotels are already being converted to student housing, but in a slow, costly manner with no real on-going support,” said Bradt. As a global company, CampusBrands will provide developers with both a complete hotel conversion process and a global operational and marketing platform, to ensure the success in their new asset category, he said.

CityView, an institutional investment firm founded in 2003 by former HUD secretary Henry Cisneros, has expanded into the student housing sector with West 27th Place, a mixed-use market rate student housing development that recently broke ground on a site adjacent to the University of Southern California and Staples Center in downtown Los Angeles. The 161-unit, 410-bed development, which includes studios, one-bedroom and four-bedroom units, approximately 22,000 square feet of street-facing retail space and 183 parking spaces, is being built by Los Angeles-based Symphony Development. Atlanta-based student housing developer and manager Place Properties will lease up and manage the property. The developer is aiming for LEED Gold certification by the U.S. Green Building Council. CityView has equity or structured debt investments in innovative urban projects in 13 states.

Pierce Education Properties, with years of experience in the student housing business, is on an expansion course. The company entered the student housing arena with a ten-year contract to provide housing for students at San Diego State University, went national in 2006 and is looking to exponentially grow its 5,000-bed portfolio over the next couple of years, mainly through acquisitions in joint venture with institutional partners. “We have $200 million in offers out right now,” said Fred Pierce, president and CEO of Pierce Education Properties, in a recent interview.

Lane Company also believes the time is right to expand its student housing management business. “More and more of our clients are starting to express an interest in student housing,” said Jones, who heads the company’s newly formed student housing division focused entirely on the management of off-campus student apartments.

Lane has been active in the sector for 15 years through its management arm, Lane Management LLC.

Maximizing management
The formation of Lane’s student housing division comes several months after former Place Properties COO and Chief Investment Officer Cindy Pfeifer was hired to serve as Lane’s president, a position created for her by CEO and Chairman George Lane. Jones calls that timing more coincidence than strategy.

“We have a team of talented, experienced associates who know the business and the particular nuances of student housing,” said Lane Management President Rob Couch. “This move lets us expand our demonstrated and proven success to a wider audience and ownership base.” In addition to Jones, who has two decades of property management experience, 10 of those years devoted to student housing, the team includes two new employees with extensive backgrounds in student housing — Wesley Deese and Michael Mulholland.

Lane currently manages a total of four student housing communities for two owners, one at Georgia Tech, one at the University of Louisville, one at Eastern Carolina University and one at Georgia College and State University. The firm’s business expansion will begin in markets where it already has a footprint, either through ownership or management. “We already have a presence in Texas, Florida, Georgia and North Carolina and we will use those as launching pads into the states nearby, but we fully expect to be in most large markets where we can have an impact, because we are focusing on off-campus student housing, both purpose-built and conventional.

“It all depends on how close to campus the community is, as to what the student mix might be. We prefer to solely devote the property to students, but, in some markets, it’s not practical or aligned with the owners’ objectives. Because we already have the expertise managing other segments, we can combine the two, although each side has its own particular intricacies that need to be understood,” said Jones.

Future growth will come from new student housing development projects that a few of Lane’s clients are planning. “They’ve got some on the table now and continue to look for ways to raise capital. That’s the other attractive thing about student housing — there are many different ways to finance it today, unlike the conventional side, which is limited on where to go for money,” said Jones. But underwriting standards are more prohibitive today then they were in pre-recession times. Developers must put more equity into each deal because loan proceeds are lower — typically 65 to 70 percent loan-to-cost for a construction loan.

The good news is institutional investors on both the debt and equity sides see the profitability in student housing.

“Student housing is leased by the bed, you’re getting more per square foot and student communities tend to be larger than many conventional apartment communities. Plus, management is driven by the revenue of the properties, which don’t require the same oversight in terms of compliance. So, from a corporate perspective, we’ve switched some of the compliance to time spent on marketing. Because a marketing person can cover a few more properties than a compliance person, I don’t think it’s as resource intensive for our corporate organization,” said Jones.

He expects student housing will be the company’s fastest growing segment going forward. “I don’t think it will ever overtake the conventional side, but I think it will be a significant part of our business,” he said.