Student Off-Campus Housing Is Back-to-School Bargain

student housingSome of the millions of students heading back to college-and their parents-are finding a pleasant surprise: Landlords nationwide are cutting rents because of an oversupply of student housing in college towns.

Source: Source: WSJ | Published on August 28, 2013

Since 2010, private-equity firms, real-estate investment trusts and private developers have been cranking up delivery of off-campus accommodations, often rich with amenities such as pools and movie theaters. That has raised fears of a glut in some markets, which has sparked a rout in the stocks of developers specializing in student housing.

A record 51,000 new off-campus beds are expected to be delivered in college towns nationwide this year, according to Axiometrics Inc. Developer interest in the sector has swelled on the belief that enrollment was outpacing the ability of budget-constrained schools to build or modernize on-campus housing.

But developers appear to have overshot the mark in numerous markets. Some of them failed to take into account other construction that was planned, say experts. Others misjudged future enrollments or the willingness of students to pay up for off-campus living at the time when many families are still pressed in the aftermath of the economic downturn.

With vacancy rates rising due to the new supply, new and existing complexes near schools such as Florida State University, Kennesaw State University in Georgia and Arizona State University are being forced to cut rents to fill beds.

American Campus Communities Inc., the nation's largest owner and operator of student housing with more than 123,000 beds in about 200 communities, recently changed its occupancy forecast to a range of 95.5% to 98.5% for this year, indicating occupancy could come in below last year's 96.8%.

Overall, the student-housing vacancy rate in the top 74 universities tracked by Axiometrics rose to 6.7% for the 2012-2013 school year, up from 5.2% a year earlier. That means that more than 37,000 beds will be empty in September.

"There's more supply than demand, that's the easy way to say it," says Jay Denton, Axiometrics director of research. "Somebody's getting hurt."

In Tempe, Ariz., near Arizona State University, more than 1,500 beds will be added this year, compared with 400 in 2012. Last year, the Tempe campus had more than 60,000 students enrolled, up only slightly from 2011.

One off-campus complex in Tempe, 922 Place, suffered a 41% vacancy rate last year, even though its amenities include free tanning and a hot tub. American Campus, which purchased the complex a year ago, was able to decrease vacancy to 3% this year by cutting rents 12%.

Florida State, in Tallahassee, saw 7,365 off-campus beds delivered over the past decade, while enrollment has only risen about 4,000, according to Axiometrics. Developers have had to lower rents about 4.8% this year to attract tenants, the research firm says.

Competition is particularly acute among developers of upscale communities who are hoping to charge premium rents by offering amenities such as ice-skating rinks and swimming pools. In some cases, the rent can be well above $1,000 a month, while shared dorm rooms can run as low as $500 a month. "We do see people tending to overbuild at the higher price points," says Bill Bayless, chief executive of American Campus, which builds more-affordable and high-end communities.

Wall Street began to sour on the student-housing sector earlier this year, sending the stocks of companies such as American Campus and Education Realty Trust Inc. EDRĀ 0.00% down about 25% and more than 15%, respectively, this year. By comparison, the broader FTSE NAREIT All Equity REITs index is up more than 1%.

Freddie Mac, which last year guaranteed a record $1.7 billion in loans made to student-housing developers throughout the country, also has taken notice. Earlier this year, the company began asking some developers to increase their equity contributions to projects by 5% to 10% for a total of 25% to 30%, according to Rich Martinez, a vice president of multifamily production and sales. "We are concerned about the amount of new construction activity in some markets, along with inexperienced owners and new capital sources coming into the market," he said.

Until the mid-1990s, most of the market consisted of small mom-and-pop businesses in college towns. But companies such as American Campus began building national companies that benefited from building, marketing, managing and buying material in bulk.

While some of the supply hitting the market is the result of overzealous developers, the product likely will be absorbed over time, say analysts. Plus, Mr. Bayless points out, much of the new supply is "the modernization of product that was neglected for decades."

Supply and demand trends have looked compelling. The Department of Education projects there will be 24.1 million full- and part-time students attending the nation's colleges in 2021, up from 21.8 million this year and 16.9 million in 2003.

On-campus construction hasn't kept up. Between 2009 and 2013, the number of dorm beds increased by about 151,000 to 3 million. During that same period, full-time enrollment increased by 606,000 to 13.3 million, according to the Department of Education.

Some developers have fared better than others. Landmark Properties, a private developer in Athens, Ga., recently opened three new communities-in Tucson, State College, Pa., and Oxford, Miss.-that were 100% leased before the doors opened. In Pennsylvania, Landmark was able to raise rents three times without slowing demand. "We literally had a line out the door," said Landmark Chief Executive J. Wesley Rogers, who plans four new communities for 2014.

But developers that built projects to serve Kennesaw State north of Atlanta have seen mixed results. The school has about 25,000 students and the number of beds serving on- and off-campus doubled in the past two years to 6,100. Off-campus housing is currently 91% leased, down from 100% last year, according to Axiometrics.

American Campus, which often buys distressed properties, recently cut rents 6% to $549 a month at U Pointe Kennesaw, a 795-bed complex it purchased last year as part of a 19-property acquisition from Kayne Anderson Real Estate Advisors, a private-equity firm. American Campus also spent $700,000 to add a fitness center and theater room, and it has boosted occupancy to 91% from 83% a year ago.

Al Rabil, managing partner of Kayne Anderson, said the firm miscalculated demand. It turned out that more students commuted from home than the firm realized, he said.

"We underperformed our expectations," he said. "It is ill-advised to build there."