In June, Chapel View Apartments, a 224-unit garden-style apartment complex less than three miles from the University of North Carolina Chapel Hill and home to hundreds of students, was sold for $15.3 million. The buyer was not one of the usual suspects -- a private investor, for instance, or a local developer. Instead, it was a real estate investment trust: Newtown Square, Pennsylvaniabased GMH Communities Trust, which went public in October.
GMH is one of a growing number of institutional investors that are buying stakes in student housing as swelling college enrollments make this market more attractive. For investment purposes, student housing applies to off-campus construction built specifically for students and standard apartment complexes that are near schools and cater to students.
GMH made no fewer than 16 student-housing acquisitions, valued at $333 million, in the first half of 2005. “We estimate the student-housing market to be worth about $159 billion, and right now only about 3 percent of that is owned by national players or major operators,” says GMH chief financial officer Bradley Harris. “Our plan is to consolidate a decent portion of this industry.”
Student housing sells at a yield premium to conventional apartments because, until recently, it wasn’t considered an institutional asset class. What’s more, it usually generates higher per-square-foot rents than regular apartments.
Ryan Reid, the Dallas-based national director of CB Richard Ellis’s student-housing group, estimates that the cap rate (the annual income divided by the purchase price) for student housing averages 6.5 percent. Although that’s down from 7 percent at the start of the year -- reflecting the intense buying interest -- it is still 50 to 100 basis points higher than for conventional apartments. “As the sector becomes better known, you may see the difference between multifamily and student housing compress further versus the spread you see now,” warns William Bayless, chief executive officer of Austin, Texasbased American Campus Communities, the first REIT focused on student housing to go public.
But for now the sector is sizzling. Los Angelesbased CBRE estimates that total sales approached $1 billion in the first quarter of 2005 alone, versus $1.1 billion for all of last year and just $300 million for 2003.
Along with GMH, two other REITs focusing on the sector have gone public in the past year: American Campus Communities and Memphis, Tennesseebased Education Realty Trust. The three raised a combined $935 million.
Demand for student housing -- by students, anyway -- can only grow. The Department of Education reports that enrollment at degree-granting institutions increased 17 percent between 1988 and 2000 and projects that it will rise 19 percent between 2000 and 2013. This would mean that in the next decade 18.2 million students will need a place to stash their laptops and dirty socks.
Of course, the student-housing market has some special characteristics. For one thing, old renters leave and new ones arrive during a short window, which makes managing these properties a particular challenge.
“Lease-up is critical,” says GMH’s Harris. “When you have almost all of your students coming in late August and early September, you basically have two weeks to prepare the units and sign up new tenants. If you mismanage either of those aspects of the business, you’ve missed the market for the year.”
