by Mike Vogel
Updated 10 months ago
In July, Global City Development completed The One at University City, a $231-million, 1,244-bed private dorm across the street in Sweetwater from one of the state’s and nation’s largest universities, Florida International. Over their careers, the principals of Miami-based Global City have developed $10 billion in high-rise residential and other real estate, but this was their first dorm.
The project fit their development goals of aligning with a “public good” — education, in this case, says principal Brian Pearl. The money in student housing isn’t bad either. “For equity investors in the typical student housing deal, they can make 20%-plus a year,” he says.
That kind of return explains why developers and investors have poured into the private dorm market around Florida campuses. Since 2011, the state has added 40,000 privately owned, off-campus beds, second only to Texas nationally, according to RealPage, a property management software company. Florida universities have been “a popular choice” for developers, says Carl Whitaker, market analyst at Texas-based RealPage. “That’s not a terribly surprising trend though, as many Florida-based universities are among the nation’s fastest-growing,” he says.
Since 2011, Tallahassee has led the nation with 13,300 privately built off-campus beds. Another 1,600 will come by fall 2022, according to RealPage. Gainesville, over the same period, gained 8,400 beds off campus, including 2,600 this year, tops in the nation for 2020. The areas around the University of South Florida and the University of Central Florida each added 5,000 private beds since 2011.
After the Great Recession, dormbuilding’s seeming immunity from economic cycles drew institutional and international investors. Tenants are young, leasing windows short, turnover and wear-and-tear high, but enrollment was growing nationally and dorm rent tends to be parent-guaranteed. Plus, colleges weren’t building on-campus dorms as fast as they were adding students.
Developers stepped in and competed for students by offering luxury products — The One has a 5,000-sq.-ft. pool — that are a far cry from the rundown houses previous generations of students shared with several housemates. The new housing catered to young people who grew up without ever having shared a bedroom. The dorms offered fitness centers and — often — a bathroom for every bedroom.
Early this year, transaction prices per unit and per bed nationally were near records at $235,429 and $96,295, respectively, according to commercial real estate broker Newmark Knight Frank.
The sector, however, was seeing challenges. An amenity arms race meant buildings that were only a decade old were becoming obsolete. Rent increases slowed in markets with oversupply. The small fraction of student housing debt that had been turned into commercial mortgage-backed securities showed rising delinquency rates, especially compared to the overall apartment rental market. The rate rose to 3.8% in April, up from 0.2% in January 2018 — before popping above 9% in May amid campus shutdowns, according to DBRSMorningstar.
There also has been uncertainty over whether parents would pay for students to live in dorms while studying online. Meanwhile, a Florida congressman, U.S. Rep Al Lawson, a Democrat, called for private dorms to allow students to break leases without penalty. And the mother of a UCF student sued her daughter’s private dorm because it wouldn’t return rent after her daughter came home when the university went online. Private dorm owners, beholden to lenders, investors and bills for insurance and property taxes, lacked the flexibility that universities — supplemented by federal coronavirus aid — had to let students out of leases.
The sector’s prospects were said to be dimming. Midtown Campus Properties, a development vehicle allied with Miami- based Roger Development Group, in May sought Chapter 11 protection for Midtown and the 589-bed dorm project it was building near UF and Ben Hill Griffin Stadium. Roger CEO Oscar A. Roger, in a court filing, blamed construction delays from Hurricane Irma, labor shortages, disputes with its general contractor and, finally, the pandemic and the uncertainty over whether UF would reopen. Midtown was financed with $77.8 million in Florida Development Finance student housing revenue bonds. Efforts to obtain an interview with Roger Development were unsuccessful.
Midtown, however, appears a one-off. Florida dorm properties — and most nationally — have largely skated. “Students still wanted to be on campus,” says Gwen Roush, a senior vice president with DBRSMorningstar. None of the troubled loans DBRSMorningstar tracks is secured by Florida dorms.
Nationally, private dorms also benefited by picking up the displaced as colleges “de-densified” on-campus dorms. Those with a bathroom for every bedroom had value for students in the pandemic. At The One, just over half of the units are one-bedrooms or studios. “Highly unusual for student housing,” says Pearl, the principal with developer Global City, but “it played to our advantage with the virus.”
Pearl says he hoped pre-pandemic to open at 95% occupancy. It fell short but still “above” 90%. “It’s very good,” Pearl says.
The occupancy success was repeated throughout the sector. Treo Group, for example, opened a 602-bed student housing community, Vox Tallahassee, in August with 99.7% occupancy, says Carlos Ortega, principal of the Miami-based Treo. “Fortunately, student housing has once again proven to be a very resilient asset class,” Ortega says.
The pandemic has affected the owners’ ability to push rents, however. Overall at The One, Pearl says, rents came in at 5% to 6% below expectations. “Every market is really its own submarket,” says Ryan Lang, a UF grad and vice chairman and head of Newmark Knight Frank’s student housing division in Austin, Texas. For instance, a number of developers and investors are interested only in dorm projects near number of developers and investors are interested only in dorm projects near to major athletic conferences. Private dorms within a mile of Power 5 conference universities command an average price per bed 30.9% higher than other dorms, according to Real Capital Analytics. The FIU Panthers compete in Conference USA, but The One has a rooftop deck overlooking the football stadium. “We’re very selective. It’s basically right across the street from the campus,” Pearl says. “There’s no property closer than ours.”
The One was financed with $231 million in private activity bonds, the same tax-exempt, government-sponsored debt that passenger rail company Brightline uses to construct its Florida rail lines and Las Vegas-Southern California train line. The bond issue for The One, offered in 2018, was one of the largest of that financing type for off-campus housing in the nation. The bonds mean lower interest costs for Global City. As a condition to get 100% financing for the project, The One — really, the bondholder owners — will make annual payments to FIU that will fund $50 million in scholarships over the 40-year life of the bonds and turn over the dorm to FIU in 2058.
There’s so much development in Florida and the nation that some fret about overbuilding. David Druey, regional president for Centennial Bank, which is lending to developer Treo for a new Vox Miami student housing project, worries about the staying power of the student market and likes to see a secondary market that can be tapped for tenants if students don’t materialize. Developers, looking for a fall-back market, design projects to appeal to both young professionals and students.
Lang, head of Newmark Knight Frank’s student housing division, says that looking forward, Florida “is in a pretty good spot.”
Berkadia, another commercial real estate broker, projects the state will add 23,000 students over five years — third nationally, in line with its population rank, behind California and Texas.
Pearl and Global City are looking for more student housing development projects. They bring in development fees, decades of asset management fees and “we’re able to pay back our investors at good returns.”
Public-Private Partnerships and Student Housing
Florida is a national leader in public-private partnerships (P3s) to accelerate road construction. Think I-595 in Broward, the PortMiami tunnel and I-4 Ultimate in Orange County.
Fewer P3s have emerged to build on-campus student housing. Florida Poly and the University of Central Florida have used P3s to build dorms. Florida State has one for its 400-bed dorms underway at its Panama City campus. The University of South Florida won an industry award for the P3 that added 2,171 beds in Tampa.
But compared to some other states, Florida’s universities haven’t given P3s a big embrace, says Ken Artin, an attorney with Bryant Miller Olive in Orlando who works on P3s and financing for higher education projects.
In general in a P3, a university leases land to a private developer, and the developer uses the university tie to raise money from investors or to borrow from lenders to build, own and operate the dorm. The developer is at risk for construction overruns and revenue shortfalls but gets to keep the profits after making lease payments to the university. The university gets its housing need addressed while focusing instead on education.
Last year, a $250-million student housing complex deal at the University of Oklahoma blew up with the owner accusing the university of betrayal. The incident gave pause across the industry. In Florida, there’s been no disaster. However, a 410-bed dorm opened in 2016 and built in a P3 at Florida International University’s waterfront Biscayne Bay campus has underperformed. Moody’s in January downgraded the debt on it to Ba3 with a negative outlook. “Operational challenges” — such as rents falling short of goals — have limited the dorm’s ability to cover debt and led to a weakened balance sheet, Moody’s said. In the last academic year, performance was improving. “We finally found the right formula,” says Andrew Naylor, FIU’s senior director of housing and residential life, “and then COVID hit.”
‘A Win-Win for Everybody’
In August, five days early and under budget, developer Pembroke Student Housing finished an eight-story, 510-bed dorm for Palm Beach Atlantic University, a small, Christian college on the waterfront in West Palm Beach. It was the first student housing development for Pembroke, a firm founded by Dale Hedrick, whose West Palm Beach-based Hedrick Brothers Construction also was the project’s general contractor.
The 163,000-sq.-ft. building has collaborative spaces, the latest in security cameras and secure entries, solid-core doors — “better than a lot of apartments,” Hedrick says — and individual units with stoves and refrigerators. Laundry machines send texts to students when their clothes are done. There’s a bathroom for every bedroom — no gang bathroom down the hall. Palm Beach Atlantic and Hedrick’s Pembroke developed the dorm in a partnership. Pembroke was responsible for financing and construction. “A win-win for everybody,” Hedrick says.
The project was financed with tax-exempt bonds. The university retains ownership of the land, receives excess revenue from the project, and the building will revert to the school when the bonds are repaid. Provident Resources Group, based in Baton Rouge, owns the dorm. Pembroke profited on a development fee.
Hedrick says he views an economy as the movement of money in society: “We always look at where the money is going and where there is a need.”
Private Dorm Development in Florida
Fred Pierce, CEO of San Diego-based Pierce Education Properties, an owner of off-campus student apartments in Gainesville and Tampa, had an e-mail exchange with FLORIDA TREND about the private student housing sector.
FLORIDA TREND: Is Florida of interest for new investment?
Fred Pierce: We have been looking at other assets in Gainesville, as well as in Boca Raton (FAU).
FT: What brought you to invest in Florida?
FP: Our acquisition criteria includes purchasing properties at large (20,000+ undergraduates or 25,000+ total students) public universities that play Division 1 (FBS) football that participate in the Power Five athletic conferences or in the “Group of Five” athletic conferences if located in major metropolitan markets. Universities meeting those criteria in Florida include the University of Florida, Florida State University, the University of South Florida, the University of Central Florida, Florida Atlantic University and Florida International University. Florida also has a growing population that translates to increasing college enrollments.
FT: How does Florida compare to other markets?
FP: Our current markets — Gainesville and Tampa — have performed strongly in terms of occupancy and rent growth. However, the barriers to entry are lower in Florida than most other states, so investors and operators should be mindful of asset selection and positioning in the context of likely future supply.
FT: Is overbuilding a concern?
FP: We closely monitor market supply and demand in all of our target markets. By way of example, while Tallahassee meets our primary acquisition criteria, we are currently not pursuing acquisitions in that market due to the current state of overbuilding.
FT: What’s been the impact of COVID-19?
FP: Our portfolio pre-leasing for fall 2020 ended down 3% vs. fall 2019 — pretty good performance during a global pandemic. The move-in was very strong, and our portfolio “no show” rate was consistent with past years. Fall 2020 occupancies have been more impacted by new supply than by COVID-19. A lesson this year has been that, irrespective of educational delivery method, university students want to live at school for the full college experience.
FT: What’s the long-term outlook in Florida?
FP: Florida’s flagship public universities are very large, and enrollment demand continues to grow. Performance should be enhanced with a reduction in future new development, as many markets are near their saturation point in terms of total supply. The demand for future new student housing development at Florida’s flagship public universities will be highly correlated with increases in enrollment.
Read more in Florida Trend's November issue.
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