Student Housing: A rare bright spot in CRE

Student Housing: A rare bright spot in CRE

By DON JACOBSON, Special to the Star Tribune

Student housing is an often-ignored niche of multifamily real estate that’s surviving the recession quite well in many instances, especially when it’s connected to schools and universities that have growing enrollments, like the University of Minnesota.

Unlike many other types of commercial real estate, investors in the form of real estate investment trusts (REITs) are putting money into student housing, and banks are making loans to the builders of such housing, attracted by their stable occupancy rates and the fact that rents charged to students have held up well during the recession — in some cases, even risen.

The continued need for student housing is illustrated by the fact that colleges themselves are building their own. Minnesota State University, Mankato, for instance, this month broke ground on a $23.8 million, 118,000-square-foot residence hall. It’s a four-story, “semi-suite” style facility set up to accommodate 300 students — the second new residence hall on its campus in the last two years.

And in some cases, colleges are partnering with nonprofits to provide new student housing units. At St. Cloud State, the J.A. Wedum Foundation is developing a huge housing project for up to 455 students that it is leasing to the university for 10 years. Called Coborn Plaza, it is envisioned as the first phase of a $165 million redevelopment of St. Cloud’s downtown Fifth Avenue Corridor.

The 412 Lofts project

Construction cranes will also be in the air in Minneapolis’ Marcy Holmes neighborhood, where developer Kelly Doran has launched his 412 Lofts project, a sort of companion piece to his Sydney Hall student housing development in Dinkytown. The new building, on the site of what was once the Heart of the Earth Survival School, will have 102 rental units on the northeast corner of the intersection of 4th Street and 12th Avenue SE.

Earlier this year, Doran bemoaned the lack of bank financing available to get his 412 Lofts project off the ground, despite the success of Sydney Hall, which has been fully rented. Local lenders, he said, were still so spooked by the economic downturn that even developers with solid track records in the dependable student housing space couldn’t find financial backing.

But, he said, things have loosened up a bit now and TCF Bank has partnered with him on the new project, attracted by the stable occupancies and rents of student housing attached to healthy schools such as the U of M.

“The financing spigot isn’t all the way open. It’s still coming out in a slow dribble, but I think it’s being influenced by the fact there seems to be more institutional interest in buying or permanently financing multifamily housing right now,” Doran said. “There’s a lot of interest from pension funds and life insurance companies, and, of course, from government agencies like Freddie Mac and Fannie Mae, and that has caused banks to become more interested in lending on that type of product.”

He said Sydney Hall, with all its 125 units full, “demonstrated what the market will bear at the University.”

But, he added, finding backing for and successfully developing any kind of multifamily housing is very dependent on specific locations in which the economic equation will work — areas “where you can command high enough rents to justify the construction costs.”

Agreeing with that is John Karlen, an associate in the Minneapolis office of Marcus & Millichap, which has handled several recent student housing apartment sales around the state.

“It depends on the school and their policies, and whether their enrollment is declining or expanding, but generally student housing has been a bright spot in the current economy,” he said. “People are looking for stability in investment real estate and if you’re at a college that has expanding enrollment, it’s more of sure thing.”

There’s less chance of student housing suffering from vacancies or bad debts than other types of multifamily housing because many landlords can obtain full-year leases from students, leasing up to capacity nine to 12 months in advance of the school year.

“They’ve got quite a bit of time to know how they’ll be doing, and if they need to, they can tweak the rents and concessions,” Karlen said.


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