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 65 apartments out of his car on his first project in 2011, which was the city's second purpose-built asset. Roth is also a Missouri State grad himself. Missouri State's enrollment was 21,309 as of August 2018. So enrollment-wise, that figure tips the university just north of the Tier 2 line, with some of its athletics in Division 1 and others in Division 2. By some designations, the school is a gray area, tier-wise. "I think that sometimes these schools get overlooked, leaving opportunity for other investors who are willing to take the risk in those markets," Roth says. The Preiss Company, whose top performers in rent growth are Class B properties in Tier 1 mar- kets, is also looking at some of those areas that surround the clas- sic Tier 1 bull's-eye. "We have been successful in identifying Tier 2 markets that are transitioning to Tier 1 mar- kets," says Donna Preiss, founder and CEO of The Preiss Company. "State governments have real- ized that Tier 1 universities drive significant income to the state. They have also realized that many states have only two Tier 1 uni- versities and are trying to increase that number." Moving the needle on markets that teeter between tiers takes a deep bench of experience. "In Springfield, my local knowledge and the ability to work with the city and county for tax abatements and rezoning and things like that helped us get into deals," says Roth. Vecino's uniqueness is in what it calls its "gut check." This means every project has to target a com- munity issue, give back, or set an example in some way. "If we don't hit our internal gut check," Roth says, "we won't do it." For example, the Springfield Chamber of Commerce has iden- tified brain drain as a significant community challenge. This trend typically involves students attend- ing Missouri State, then going back home or elsewhere for jobs after graduation, often to Kan- sas City or St. Louis. Addressing that, Vecino programs monthly speakers to talk to students at its properties. The speakers are typically entre- preneurs, such as local chocolat- iers, photographers, hoteliers or nonprofit leaders. "The students can meet some of these entrepre- neurs and maybe they become a mentor or offer an intern- ship. We're trying to introduce our residents to people in our community." Vecino developed four proper- ties on the same downtown city block in Springfield: Cresco, a new build that opened in 2017; Sky Eleven and Sterling, which opened in 2015; and The U, which opened in 2014. Each was a his- toric remodel. "The fact that we gave new life to three 100-year-old vacant buildings also helped us hit our gut check," Roth says. Vecino owns a total of 1,500 beds, both operating and under development. Notably opening this year is Block 22, a mixed-use redevelopment that is a finalist for the 2018 Award of Excellence by the University Economic Devel- opment Association, which is a member-driven national organiza- tion founded in 1976 to advance knowledge and practice in eco- nomic engagement by institutions of higher education. The development is a public- private partnership among the Vecino Group, Pittsburg State University (PSU) and the City of Pittsburg, Kansas, in which four historic buildings are being rede- veloped into what Vecino calls a "regional innovation hub." Block 22 features 90 units of student housing, co-working and office space, a fully equipped maker's space, retail space and is home to PSU's Center for Innovation & Business Development. The residential units opened August 2018, and the commercial space is scheduled to open by year's end. Opportunity or Huge Risk? Many investors are watching national education trends to mon- itor whether Tier 2 markets could be potential areas for develop- ment in the future. The trends hit both the pro and the con sides of the argument. Tier 2 and 3 univer- sities, for most larger owners — especially those partnering with institutional capital — tend to be a bit of a gamble, unless they align with a company's investment thesis. "When investors seek to label markets with tiers, what they are saying is that each has a unique risk profile that should deter- mine whether it is suitable for their strategy, and if so, at what required rate of return?" says Josh Greenleaf, vice president of investments for Austin-based Campus Advantage. "Risk can be distilled into two equally impor- tant components, the probability and severity of negative events." Greenleaf says that many fac- tors distinguish schools as Tier 1, 2 or 3, but that the main factors are enrollment size and acceptance ratio. "Larger, Tier 1 schools are typi- cally more resilient to supply and demand shocks than lower tier schools because of their larger demand base to absorb a given level of change in either supply or demand," Greenleaf says. "Tier 2 and 3 schools are smaller and

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