At April’s InterFace Student Housing Conference, a panel gathered to discuss the most popular trend in student housing development — urban communities. In town, close to campus, and truly walkable define the most sought-after projects these days.
But building close to campus is fraught with challenges. Troy Manson, managing director with HFF, led panelists Judd Bobilin, president and CEO of Chance Partners; JJ Smith, principal CA Ventures; and Donnie Gross, co-founder and managing member of Varsity Investment Group; through this hot topic. Here is an excerpt of the panel, titled “Urban Development: Penciling, Designing & Operating High-Rise Student Housing in Traditional Low-Rise Markets — The Issues and Trends Behind the Flurry of Acquisitions and Construction of Urban Student Housing.”
"We are in a lot of markets where we're the first new high-rise development that's walkable, aside from campus-owned property," says Principal JJ Smith.
Manson: Donnie, aside from the obvious differences of higher density/more vertical, talk about the major differences in terms of underwriting and entitlement processes. What makes your projects different being next to campus in urban environments?
Gross: The first major difference you'll find if you decide to build an urban core in-fill versus a mile or two miles away from campus is the land cost. You have to start underwriting the land cost right away, and deciding if you can generate enough NOI to offset the land cost, as well as the construction cost. The construction cost is going to be a lot higher; you're probably going to have to go with steel or concrete. You're going to have to understand the cost differences in the construction, and understand the parking. If you're a mile or two miles away, you might create a parking ratio of 1:1 or 0.5:1 or something like that. My partner and I believe in building less parking. We're paying the money for the land, therefore we want the students to be able to walk.
Manson: You talk about construction costs. I assume contractor selection is a big component as well, and a little bit different. Judd or JJ, tell us about your contractor experience.
Smith: A big component to penciling any high-rise development is going to be your construction costs. It's the largest variable in the pro forma, in my opinion. We tend to work with contractors who are more medium-sized, a bit like-sized to CA. We don't work particularly well with really large firms that tend to produce a lot of paper. We go through a pretty lengthy selection process where we're looking at eight to 10 originally, and then we're short-listing to 3 or 4. We're big proponents of competitive bid environments.
Manson: Everyone at the conference has talked about the importance of delivering on time. Clearly in a high-density project, you can't partially move people in, it's got to be all at once. How are you underwriting that, particularly with rising construction costs, contractor issues, keeping subs on jobs. What are you guys seeing?
Smith: The most important part of delivering a project on time is to start earlier than you think you need to. Starting late and shortening the overall construction schedule is really a poor thing to approach the plan with. We like to get out ahead and start earlier. If we're pushing the product to a later delivery year, that's okay. We don't want to rush a project just to rush it.
Gross: A lot of people are going to shake their heads after I say this, but we've started almost every development project before we've closed the construction loan, and we have self-funded, because in student housing if you miss a day, you miss a year. As you're negotiating your final entitlements with the city, they're trying to push you past that 2014 opening into a 2015 opening. My partners and I have discussed that it's more beneficial for us to start and finish on time than it would be to miss a whole new school year. Missing that school year is really critical.
Bobilin: We agree. We tend to bring our contractors in really early in the process, and try to select them in a pre-development exercise upfront, and really focus on schedule and obviously all of the efficiencies we can get into the cost prospect. Probably one of the biggest components of the high-rise, and even in urban in-fill, is getting that schedule exactly right. Pushing the envelope is always scary, and obviously you always end up doing it at one point or another. Getting them in early we've found has been very successful for us.
Manson: Judd, what kind of rent premium do you think you can get for high-density projects in traditionally low-density markets, such as Tallahassee or Tuscaloosa?
Bobilin: I'm not sure I actually even track that metric exactly. We really focus on the location, and really believe that the location is the key to driving the occupancy and leasing and rent growth. We've probably seen an 8 to 10 percent increase from what the low-rise product would typically get, especially in stuff that is closer to where we are. If it's farther than a mile or two miles off-campus, it probably goes up another 300 basis points each mile you go. I don't have a metric to track that, but that's certainly something we believe in. Proximity to campuses is absolutely critical. Everyone talks about walkability and proximity, but when people talk about walkable, you can't walk across a six-lane highway, it has to be truly walkable. That's a key component to what makes those rent premiums important.
Smith: A good component of that is whether you are you the first of this kind on that particular campus. We have a lot of markets where we're the first new high-rise development that's walkable, aside from campus-owned property. Those obviously have a higher rent premium across our portfolio. We've been tracking the last four years on average about a 30 percent premium over the nearest comp. That's been hard to sustain in the last leasing cycle. We had some that were 50 or 60 percent over market because we were the only new comp there, but as the supply continues to come in, we're seeing those numbers come down. Anyone building anything new is going to need to achieve a 7 to 10 percent premium to pencil a deal, so we're somewhere between 10 and 30 percent on any of our new high-rise stock.
Manson: It's all a function of making your pro forma work. As you look at programming these projects, what about bed/bath parity? Are we headed back in the other direction and doing some 2/1s and 4/2s even?
Donnie: We try to get as much 1-to-1 bed/bath parity as we possibly can because we think that is a huge differentiator. Seventy-five percent of all kids going to college these days grew up with their own bathroom.
Manson: Are you getting any push back from equity partners or lenders on that, on the lack of parity?
Gross: No, the 2/1s and 4/2s are happy that we're putting them in for a price differentiator. I've never delivered to a lender anything less than a 92 percent bed-bath parity.
Smith: We're a little bit different than that. We've gone the opposite approach with smaller units, less bed-bath parity, less parking, and we've tried to make up for it in common areas, bigger amenities and adding a social environment to the building. We don't do a lot of 1-1. We typically are in the 60 percent to 70 percent parity range. Our buildings tend to be a lot of 4/2s usually, and so that drops that weighted average down.
Manson: What are you guys seeing with the micro-unit trend? Does that have legs?
Gross: In the big metro areas such as D.C., Boston, L.A., San Francisco, Seattle , the micro-units make a lot of sense. At University of Michigan, we had studios at 370 square feet, and they sold out like crazy. If you try to make a studio less than 350 it gets a little tight for student housing. In the Big Six markets, you could see micro-units, absolutely.
Smith: We've got a couple that will be delivered in August at the University of Washington. We have two sites across the street from each other. Each building has 100 studios that are 325 square feet each. These properties abut the new campus dorms at UW, so we're getting a lot of overflow traffic. They're smaller, but bigger than a dorm room when considered that they're single-occupied.
Bobilin: We started a micro-unit concept in Tuscaloosa, and it was really sort of an R&D approach. We wanted to see if it was going to have a complete buy-in into a market that's not used to anything like it, and shockingly, those were the first units that leased up for us. We were very, very surprised by that, so we're now doing that in different projects we have as well. Because of the absolute dollar value that the resident believes they can achieve, it's been very successful. Just as long as you have the amenities that go along with it.