Second Tier Attention
Why second tier universities are becoming the number one choice for some student housing developers.
At many flagship public universities, enrollment numbers have been capped to control costs and maintain the schools' abilities to properly serve their students. While enrollment numbers remained capped at these institutions, college enrollment as a whole has not. This increased demand has created a need for second tier schools to rise to the challenge of creating solid four-year environments, academically and socially, for their students.
For many second tier schools, the growth has been dramatic, outpacing the university's ability to build an adequate volume of beds to house students. That has created an opportunity for off-campus student housing developers to look at second tier schools as a huge growth opportunity.
"Some of the secondary university markets have become the new gold rush territories," says Scott Duckett, executive vice president of Campus Advantage. "Historically, there hasn't been much of a focus on these markets. The demand is there, the numbers are there and developers are finding more opportunities in these markets."
Discovering the Market
As the off-campus student housing sector evolves, it makes sense that the phenomenon that started at top tier institutions would push down to second tier universities.
"Most second tier universities are seeing tremendous enrollment growth," says Duckett. "There are a lot of demand drivers, chief among them tier one universities who are capping their enrollments. This essentially caps the ability of many students to make it into the tier one institutions. Many are looking at tier two schools as alternatives to the flagship schools. As a result, enrollments are shooting through the roof."
That growth in enrollment is constraining the on-ampus housing supply and campuses are looking to off-campus players to fill the void. While housing at second tier universities is nothing new, what is new is the interest that many developers are paying to it, and who those developers are. In the past, you may have seen local developers build a project near these campuses. Now, regional and national players are stepping into some second tier university markets, and discovering they are not the first one planting a flag.
"When you see a market and all the major developers are active there, you know that it has become prime time," says Roger Phillips, CEO and principal of Dallas-based Texla Housing Partners. "As developers, our thoughts are changing a little bit as we look at these markets. If you are there early enough you can take advantage of some opportunities as that trickle-down effect [from the enrollment] starts to kick in."
Many second tier markets have their fill of off-campus developers and some, like the Texas State University market in San Marcos, might even be considered on the edge of overbuilt. While that is the case, many developers believe that the vast majority of second tier schools are in need of professionally owned and operated purpose-built off-campus student housing.
"There is a sizeable set of markets in a variety of second tier schools that are largely untapped," says Erik Steffensen, development executive with the United Group of Companies. "If the market is incredibly underserved for their resident population, we do fantastically in those markets because there is no other solution."
As one of the largest consultants for developments in student housing, Campus Advantage is often called in to perform feasibility studies on markets with second tier schools.
"Often, it is regional developers who are following the wave of development in a particular market," says Duckett. "Sometimes they want to be the pioneer in the market. They've heard of a concept and are familiar with the campus and the area."
Like United Group, Campus Crest has had success near second tier schools like the University of West Georgia and Stephen F. Austin University (Natchitoches, Texas). The company is developing a project near Northern Arizona University in Flagstaff.
"A lot of times, there are competitors in the market," says Ted Rollins, Campus Crest's co-CEO. "We just bring a new approach to it."
At some second tier campuses where Campus Advantage has performed consulting work, full-time student enrollment has grown as much as 40 percent over a five-year period.
"Many student housing developers look at these markets as the best place to go when faced with limited opportunities at the larger institutions," says Duckett. "The large, flagship colleges now have high barriers to entry or, in the case of Gainesville, Tallahassee or College Station, have a tremendous amount of purpose-built student housing in the market."
Differences Between Flagship and Second Tier Markets
Developers at second tier universities believe the opportunity is there for projects that are long-term holds, or that are bought by other investor-operators whounderstand the dynamics at play in these markets.
"Investors are underwriting the university," says Campus Advantage's Duckett. "A university that has more than 8,000 students and has a history of growth is one that is comfortable with investors. They are going to be able to hold the asset for their set investment period and achieve their returns. Lenders are looking at the institutions, not the city they are in. They look at what is the true percentage of full-time student versus total enrollment; what is the percentage of out-of-state students versus in-state students."
United Group's Steffensen says second tier schools offer a number of positives to developers.
"Land can still be acquired at relatively attractive rates in many markets," he says. "There are a lot of areas around these towns where they have sophisticated master plans that actively encourage development of student housing in the private sector. The universities typically also have capital plans where they would rather not have the bulk of their expenditures be in the housing category. They cannot ignore the housing area if it is underserved."
"Investors look at it differently and lenders look at it differently. Everyone involved screens [these markets] a little differently," adds Phillips.
Campus Crest, who has developed at flagship and second tier universities, believes that a market's biggest asset is the strength of the university.
"The difference is the recognition of the name brand institution," says Rollins. "If you look at the underlying MSA, based on everything other than the school, the markets are smaller. You will get a pass on the SMSA (standard metropolitan statistical area) if you have a name brand school like the University of Georgia. It has a lot to do with the economic engine of the town and the draw. In second tier markets, like Carrollton, Georgia [University of West Georgia], you have a smaller SMSA and a smaller name brand school. You have to dig in and look at the school by degree programs and the quality of the education."
But the smaller market size also carries limited market potential that can be a strength for a developer.
"Just because it is a smaller SMSA, doesn't necessarily mean that it is a market that doesn't have a higher barrier to entry," says Rollins. "If you look next to any university that has its own proper town center, there is a high requirement on zoning and planning. The school is protective of that college town feel."
"It is dangerous to develop at second tier schools, because timing is everything," adds Loren King, COO of Trinitas Ventures. "Certain universities are in transition, but the real question is where are they in that transition? If [a developer] is five years early into one of these markets, you could lose your shirt."
Campus Crest says that the company's vertical integration has helped it enter mid-tier markets since its in-house construction, development and operations team allow it a high probability of success because it doesn't need to source third parties to enter the market. Phillips, of Texla Housing Partners, has a strong strategy on second tier universities.
"These are markets where the opportunities exist to get out of the tier one mentality and certainly the tier one investor/buyer pool," he says. "If you stay in the top tiers, you are competing with the Blue Vistas, ACCs and EdRs. Second tier markets allow you to separate yourself from the others."
When an owner sells an asset near a second tier university, owners say there's not much difference in return or risk since many tier one universities are also located in smaller towns or rural areas.
"Cap rates have compressed in our industry," says Duckett. "Five years ago, there was a spread between tier one and tier two institutions. That spread has been declining: we're seeing properties trade at tier two schools at or near the same pricing at some of the larger institutions."
The issue may be, however, garnering the interest of institutional buyers who are focused on owning projects in only a few strong flagship markets.
"A typical buyer of stabilized student housing may have a more difficult time getting comfortable buying an asset in a town that is not within its top 15 list," says Steffensen. "All of the things that are true in major [university] marketplaces are also true [at second tier schools] with the plausible exception of a ready made sale at maturity. That, even, is changing as student housing is becoming more popular among institutional buyers."
Many developers who enter these markets do so for the returns that will be created over the life of the project; they build with no intent to sell.
"As a developer, we are less concerned about the end resale because of the outstanding returns provided by being the first builder and the only or best student housing alternative in that market," says Steffensen.
One similarity to flagship universities is that the product type built in second-tier markets doesn't differ from that built at flagship universities. While that's the case, when an off-campus developer enters a second tier university market, they often find that the market is unaccustomed to having purpose-built student housing.
"There is an unmet demand in most of these markets for what we would consider 'modern' student housing," says Brittany Belson, director of market research for Campus Advantage. "There are conventionally operated properties where students live because of the lack of other choices. They don't have the properties that are all-inclusive with individual leases [by the bed] and the amenities that cater to students, or a residence life program."
That said, developers have used second-tier markets to create some exciting projects for students, some customized to the smaller university populations or the urban nature, yet small campus of some institutions.
In Indianapolis, Trinitas Ventures developed 1201 Indiana, a townhouse project at Indiana University-Purdue University Indianapolis. The project opened 100 percent leased and was able to raise rents several times during lease up. Trinitas COO Loren King reports that a number of lenders were reluctant to enter the market because of the university's secondary status.
"We understand how to underwrite a university that is transitioning from a commuter college to a traditional four-year university," says King. "We proved that we understood that market and that the demand for student housing was there."
1201 Indiana was developed for a medium-density urban site. The four-story building sits on four acres and consists entirely of two-story townhouses. Trinitas is duplicating the model for a similar site at Virginia Commonwealth University in Richmond that will open next fall. Trinitas is also developing a project near Kennesaw State University in the Atlanta suburb of Kennesaw, Georgia.
"KSU is a growing school that is underserved when it comes to student housing," says King. "ACC, Capstone and others have developed there, and I expect there will be more."
Trinitas performs surveys and studies where the students are currently living and where they want to live, and whether they are willing to pay the full freight to have the convenience of living near campus.
United Group has projects at many SUNY schools in areas like Albany, where it has projects that serve multiple campuses. The company has, says Steffensen, gone beyond second tier schools. It is actively developing at community colleges [see related article in this issue]. It has a project at Finger Lakes Community College in Canandaigua, New York, and North Country Community College in Saranac Lake, New York.
— Randall Shearin