Student Housing Business

SEP-OCT 2018

Student Housing Business is the voice of the student housing industry.

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TIER 2 & 3 MARKETS September/October 2018 62 Tier Two Timing Tier 2 and 3 markets aren't ready for prime time for most buyers today, but some enterprising investors are taking advantage of markets that the majority of owners overlook. By Lynn Peisner A As a general rule, with their lower risks and greater rewards, Tier 1 student housing mar- kets attract the most capital, sell at lower cap rates and produce more transaction volume. According to Axiometrics' data, deliveries in Tier 1 markets (greater than 30,000 students) accounted for 54 percent of new supply in 2017. Some major owners and investors have been pruning their portfolios of Tier 2 and 3 proper- ties and recycling the proceeds into flagship- anchored markets. Many companies deploy- ing institutional capital aren't interested in properties or portfolios that are not in Tier 1 markets, but that doesn't mean the entire industry is turning its back on universities that aren't household names. Some niche investors see opportunity at Tier 2 and 3 schools. Of course, returns at the Uni- versity of Toledo may not match the returns of new-model-year trades in Tallahassee or Aus- tin. However, some trends — such as admis- sion selectivity and enrollment caps — can roil markets and create opportunities as well as challenges. But first there's the matter of defining mar- ket tiers. Every organization has shades of difference to their interpretations. CBRE's National Student Housing Group defines tiers primarily by athletics. For CBRE, a Tier 1 asset serves a Division I, Power Five university. The Preiss Company, whose portfolio is comprised of half Tier 1 assets and half Tier 2 and 3 assets, uses the Carnegie Mellon system of classifi- cation, which is more of an academic-based ranking. For others, it's simply a matter of enrollment numbers. "There's not a consistent definition for each tier," says Austin Repetto, a principal with TSB Realty. "Overall, most people uti- lize full-time enrollment as the initial break- down of tiers, with Tier 1 enrollment greater than 20,000 students, Tier 2 between 10,000 and 20,000 students and Tier 3 below 10,000 students." There are outliers and exceptions to all the rules, of course. Jaclyn Fitts, director of CBRE's National Student Housing Group, notes a recent asset sale of The Guilford, which has been rebranded The Social North Charles, at Johns Hopkins University. "It's a very strong school in Baltimore, but it's a smaller school, under 10,000 students," she says. "Those urban schools that are not Division I but are selective and designated as R1 research insti- tutions are the types of assets that get the most play that are not Power Five." The One and Only Smaller markets and universities experience less liquidity with fewer ready buyers. As popular wisdom dictates, the lower the tier, the lower the market rents. If rents are below what is feasible for development, the question of whether to go there is a nonstarter. How- ever, being the best — or in some cases, the only — purpose-built student housing asset in a market can have advantages. "The Edge at West Chester [serving West Chester University in West Chester, Pennsyl- vania] is one example of a property that's not at a Tier 1 school, however a four-bedroom, two-bathroom unit charges more than $900 per bed for a project built in 2014," Repetto says. According to Apartment List data from September 2018, average rent for a one-bed- room conventional multifamily unit in Austin, Texas, is $1,150. "The West Chester property has performed extremely well over its lifetime and is the only purpose-built student housing property in the marketplace," adds Repetto. Roger Phillips, CEO and principal of TEXLA Housing Partners, echoes the advantages of being an above-average asset in a Tier 2 mar- ket. "I'm not averse to looking at Tier 2 mar- kets," he says. "But I'm going to add an extra layer of caution. In Tier 1, I may be more com- fortable going a mile or two from campus. In a less desirable market, I would want to be the best asset in that market. If I can show that I'm Student Housing Cap Rate Analysis Based on NCAA Designations Source: CBRE National Student Housing Mid-Year 2018 Overview * Power 5 consists of universities with football programs in The Atlantic Coast Conference, Big Ten Conference, Big 12 Conference, Pac-12 Conference and Southeastern Conference. Note: Portfolios with mixed asset types are not included. Analysis excludes transactions in Chicago.

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