Investors seek gains in college housing

Investors spent $1.5 billion in U.S. student housing
properties this year.

RALEIGH NEWS & OBSERVER

More investors are going back to college. But they’re skipping the keggers and term papers and heading straight for student housing.

Emboldened by record enrollments and reduced university spending on dormitories, investors from Main Street to Wall Street are seeking heftier gains in this emerging corner of the commercial real estate world.

Investors have spent at least $1.5 billion on U.S. student housing properties this year — already 12 percent more than the average spent over the previous six years, Real Capital Analytics data show.

One attraction: Student housing is always in demand, regardless of economic conditions such as job growth and interest rates that sway demand and values of offices, apartments and other rental properties.

“If the school is there 120 years, it’ll be there for another 120 years,” said Paul Bower, chief executive of Memphis, Tenn.-based Education Realty Trust, which owns University Towers and manages the College Inn at N.C. State. “People go to school in bad times and in good.”

For investors, times seem better than good. Babies of baby boomers are entering college at an unprecedented rate and staying longer. About half graduate within five years.

Many universities are focusing tighter budgets on academic buildings. Dorm capacity at public universities in the 15 biggest college states dropped below 25 percent in 2004, from 32 percent in 1990, according to property fund manager RREEF.

Recent move

But only recently have institutional investors given dorms the old college try. The reluctance comes in part from unfamiliarity with a fragmented segment dominated by small-time landlords. Universities and noninstitutional investors make up 92 percent of the nation’s student housing stock.

“Three years ago, [institutional investors] were really scratching their heads,” said Susan Folckemer, an executive vice president at The Preiss Co. of Raleigh, which owns, manages and develops student-housing communities throughout the South.

Investors boned up as demand for traditional properties grew.

Turned off by paltry paper returns in the stock market, many investors sought safe haven in the bricks and mortar of rental properties such as offices, warehouses, shopping centers and apartments.

But intense competition caused property prices to rise faster than rents, forcing winning bidders to accept lower initial returns.

That prompted a voyage for value in uncharted segments, including student housing. Aiding the journey: Public stock offerings from three student housing companies, GMH Communities Trust, Education Realty Trust and American Campus Communities. Their public financial reports shed light on the sector.

Investors found better returns: Cap rates —the ratio of a building’s annual net income to its purchase price — for student housing deals averaged 6.6 percent in the year ending June 30, while cap rates for other apartment deals averaged 5.2 percent.

They also found promising prospects: U.S. dorm fees grew 6.3 percent annually between 2000 and 2005, while traditional apartment rents grew only 3 percent, according to RREEF.

Things come together

Investors found that universities were willing to cede housing development to the private sector. And they got buy-in from banks willing to finance projects that lure students with maid service, game rooms and beach volleyball. They comforted parents by offering the oversight of residence assistants.

They found students such as Kevin Urben, 18, who last week joined North Carolina State’s biggest-ever freshman class. He could have stayed in university dorms, or even at his parents’ Raleigh home. But the engineering major chose Education Realty Trust’s University Towers.