Real Estate News Blog: Colleges Hire Specialized Developers

The first tenants won't move into Vista del Sol in Tempe, Ariz., until next month, but its nearly 2,000 beds have been preleased for months. Cancellations aren't a concern: There's a lengthy waiting list for tenants eager to live in a resort-like setting with pool, fitness center and theater.

The secret is location, location, location. Vista del Sol is a private development that will house college students on the campus of Arizona State University. Across the country, more colleges are starting to loosen their grip on campus housing and strike deals with specialized developers to help meet housing needs. Modern dorms built and managed by professional real-estate companies can help colleges recruit and retain students while freeing up funds needed to improve classrooms, upgrade facilities and provide financial assistance.

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For developers, the sector is considered recession-proof, thanks to generous parents and student loans. "We have been somewhat insulated from the macro economics of the economy," said Bill Bayless, chief executive of Austin, Texas.-based American Campus Communities Inc., which developed and will operate Vista del Sol.

To be sure, it is a tough, management-intensive business. Student housing has high turnover and relatively short leases. And any rooms empty when school starts will likely stay that way for months. Students generally prefer new buildings, and being near campus is a must, so newer and closer competitors are constant threats.

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There's also a price ceiling -- college students can only pay so much rent. Currently, rents range from less than $300 a month per student to more than $1,000, depending on the market and how many scholars are sharing space. And, while student loans remain available, a shortage or interest-rate spike would undoubtedly hurt business.

For investors in the bruised world of real-estate investment trusts, student housing can be considered a defensive bright spot. While one estimate has REITs losing at least 10% this year -- and some investors are increasingly jittery about apartment stocks -- two student-housing REITs, American Campus and Education Realty Trust Inc., have each returned more than 10% year to date. Merrill Lynch reportedly recently upgraded American Campus to "buy."

Plenty of statistics explain why. As the population swells and the majority of high-school graduates seek degrees, enrollment is projected to climb to 20.4 million in 2016, up nearly 42% in 25 years. By 2020, Arizona State expects its student count to jump nearly 60% to 100,000 competing for just 22,500 beds on campus. "The market is huge," said Jim Arbury, senior vice president of government affairs for the National Multi Housing Council.

There are also strong growth opportunities for companies interested in expanding through acquisitions. Plenty of student housing remains in the hands of mom-and-pop operators; the top eight players in the industry own less than 5% of total off-campus demand.

"We have not begun to corner the market," said Paul O. Bower, chief executive of Memphis, Tenn.-based Education Realty, which owns and manages 41,500 beds in 70 properties.

The biggest acquisition in the industry involved American Campus's roughly $1.4 billion purchase (including outstanding debt) of GMH Communities Trust last month. The transaction nearly doubled the size of American Campus, cementing its position as an industry giant controlling more than 92,000 beds in 145 properties.

While most private properties are located off campus, American Campus and other operators are eager to break down borders and begin developing on campus. To that end, American Campus launched a program that taps its own equity to build on campus in exchange for a traditional long-term ground lease, creating no direct debt for the school. The program so far has completed one on-campus deal, the $130 million Vista del Sol in Tempe. The property has individual rooms with private bathrooms, a tanning salon and a basketball court. Monthly rents range from $450 to $1,000 per month, comparable with Arizona State's newest traditional dorms, according to Michael Coakley, the school's Associate Vice President and Executive Director of University Housing.