FEATURE ARTICLE, NOVEMBER 2007

STUDENT HOUSING GETS AN “A” FOR INVESTMENT
TIC investment in the student housing sector is growing as competition pushes investors to diversify their holdings.
Carlos Vigon

Since an IRS ruling in 2002 that allowed tenant-in-common (TIC) ownership as an option in 1031 exchanges, TIC 1031 exchanges have grown significantly in volume, sophistication and strategic focus. In fact, TIC 1031 exchanges are viewed as much more mainstream today, providing thousands of property owners a chance to maintain — or increase — cash flow, realize greater upside in their investments and say goodbye to the headaches of property management by trading up to institutional-grade properties. The equity raised by securitized TIC sponsors in 2006 was in the range of $3.5 billion, and  some projections predict the amount of equity to increase by almost $1 billion in 2007. The property types have significantly diversified, as well. Primarily consisting of office, multifamily and retail in the “old days,” TIC sponsor portfolios now often include hospitality, senior housing, industrial, and even oil and gas.

Higher Education Does Lead to More Money

Diversification reflects the greater real estate investment mood, where heated competition fueled by a flood of investor dollars has caused property prices to rise faster than rents, forcing buyers to accept lower initial returns. And, after consistent slugfests for core assets between private and institutional investors, as well as TIC sponsors, alternative assets are now on everyone’s radar — student housing is one example. At universities across the country, but predominantly throughout the Southwest and Southeast, student populations have outpaced on-campus housing capacity, providing immediate and long-term opportunity. Additionally, it hasn’t hurt that analysis of alternative real estate asset pricing reveals that student housing deals provide higher cap rates than more conventional apartment properties, although this gap has narrowed. A number of TIC sponsors have moved to take advantage of this; evidence that the segment has definitely continued to mature and prove itself an attractive investment vehicle for 1031 exchange investors focused on stable cash flow and diversification.

While there is renewed interest in student housing, the investment vehicle is not new — parents have been buying apartments and condos for their kids for decades. What has changed is the size of the opportunity and, of course, the fact that mom and dad can now own part of the entire housing complex through a TIC 1031 exchange. According to Real Capital Analytics, 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 6 years.

Why is this suddenly such a good investment now? There are a lot of reasons — too many, in fact, to include all of them here — but these make a strong argument:

• Baby boomers’ offspring, known as echo boomers, comprise a population 80 million strong — and many of them are at or near college age.

• According to the National Center for Education Statistics (as noted in the Los Angeles Times), college enrollment will grow by 11 percent between 2003 and 2013.

• Echo boomers want more amenities. They are the first generation raised with computers, 500-channel satellite TV, the Internet, cell phones, iPods, and Blackberrys, and they demand modern facilities that are gadget-friendly.

• Nationwide, approximately 70 percent of college students rely on off-campus housing, and that ratio is even higher in many college towns.

Those reasons strongly support the immediate need, but looking at the long term it gets even better. Consider:

• Higher education in general tends to be less affected by economic trends; the sector does well during a recession when more young people choose to attend school rather than enter a soft job market.

• The student housing sector is relatively unaffected when a low-interest rate environment turns renters into homeowners.

• Rents for student housing properties have been rising at a higher rate than conventional apartments, according to the National Multi-Housing Council.

Demand from the rising college student population will continue to outpace supply in the medium term, continuing a trend of decreasing vacancy and steady rent growth. 

A Few Things to Consider

While these properties typically generate positive cash flow, there are a number of ownership challenges unique to student housing. First, there are higher expenses when compared to many other multifamily properties — insurance premiums (i.e. party coverage), utilities (including Internet and cable), repair, maintenance, advertising and fees for management services can all cost more than in a typical investment. Additionally, student housing management is very specialized, leases tend to expire at the same time and larger staffs are necessary.

However, the benefits significantly outweigh the additional management effort, as evidenced by the growing contingent of private and institutional capital aggressively seeking to acquire the limited supply of student housing assets. This rush of capital has increased prices, pushing the typical acquisition of luxury student housing assets into the $15 million to $40 million range and higher. That means, in most cases, the best way for private investors to take advantage of this market is through a TIC sponsor. TICs can more effectively compete for these institutional-grade properties and provide opportunities that individual investors otherwise would be unable to afford.

Southern Exposure

Where are these properties? They are found across the United States in communities and college towns in which universities are experiencing explosive growth. Universities deploy armies of staff and spend millions on technology to solicit high school students and win them over. They are getting the students, but need more preferred student housing, complete with all of the amenities.

Nowhere is this more evident than in the Southeast, where the growth of student populations has increased at a faster pace than in other parts of the country. Florida leads the pack, but other states aren’t far behind. A perfect example can be found at Western Kentucky University, the fastest-growing university in that state. Wilshire Holdings LLC, a national real estate principal specializing in co-ownership investments and TIC 1031 exchanges, recently announced sponsorship of the acquisition of College Suites at Campbell Lane, a student housing property that serves the university.

Wilshire Holdings performed extensive due diligence prior to selecting the property, which was constructed in 2005 and consists of 216 units with 756 beds. In addition to researching the region for its growth potential, the firm also made sure that the property was marketable to college students. Amenities that meet this expectation include:

• Gated community.

• Private bedrooms and private bathrooms.

• Largest floorplans in the market, fully furnished with fully equipped kitchens.

• Subsidized utilities, including Internet and cable, with HBO, in every bedroom.

•  Almost all units will be upgraded with plasma screen TVs for 2007/2008 school year.

• Property has a resort-style outdoor pool, Jacuzzi, expansive sun deck, lighted basketball court and sand volleyball court.

• 6,000-square-foot clubhouse with billiard tables, a 24-seat big screen movie theater, foosball, plasma screen TVs, multi-player Xbox center, state-of-the-art business center, and a 24-hour fitness center, including modern machines and free weights, in addition to two tanning beds.

• Affordable rent under $400 per month, including utilities.

As they say, this isn’t your parent’s dorm, and that is exactly why universities love them. As competition for students gets more heated, universities faced with spending money on academics, sports or student services versus new student housing will increasingly welcome private development and ownership. Universities throughout the Southeast have certainly caught on.

Carlos Vigon is president and CEO of Wilshire Holdings, a Los Angeles-based real estate investment and asset management firm that specializes in the selection and structuring of investment opportunities for Tenant in Common (TIC) groups and LLC structured syndicates.

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