A 5.2 cap at a flagship against a 7.3 at a growing regional, and which risk is worth owning

Question

Two student housing profiles come up constantly right now and they are genuinely hard to rank, so it is worth seeing how this room splits. The first is 240 beds within walking distance of a flagship state university, enrollment up in each of the last six years and an admit rate that keeps tightening. Priced around a 5.2% going-in on in-place rents, $148k a bed, no deferred capital worth naming. Rent growth in the submarket has been steady, and two competing deliveries are under construction within a mile. The second is 132 beds at a regional public that has grown enrollment about 3% a year off a much smaller base, driven mostly by nursing and trades-adjacent programs. Priced near a 7.3% going-in, $71k a bed, with about $600k of exterior and unit work to do. One competing property in the market and no cranes. The case for the flagship is that the enrollment cliff sorts institutions, and a school with excess applicants absorbs a smaller cohort by admitting more of who applies. You are buying demand certainty and giving up 210 basis points for it. The case against is that you are also buying into the one submarket where every institutional buyer and every developer already agrees with you, and new supply lands on your rent roll before it lands on theirs. The case for the regional is that the spread pays you for the risk and the basis per bed leaves room to be wrong on rent. The case against is that a school of that size can lose a program, a coach, or a state appropriation and drop 8% in two years, and there is no institutional bid to sell into when it does. Both arguments hold up under pressure, which is why the ranking keeps flipping. Where does the room come down?

kevin_lombard · Answer

The supply point took me two reads before it landed. At the flagship the thing that hurts you is other buyers agreeing with you, and at the regional it is nobody agreeing with you. Does the flagship deal price in what happens when those two new buildings open, or is the 5.2% on rents from before they deliver? That seems like the number I would want split out.

marcus_hale41 · Answer

I would not treat 3% a year at the regional as a trend until I see what is under it. Nursing enrollment growth often depends on clinical placement capacity and on faculty the school struggles to hire at state pay bands, and both cap out. Pull the program level counts for five years, then pull the state appropriation history and any published projection from the system office. If the growth is one department and that department is near its accreditation cap on class size, you are buying a plateau at a 7.3 rather than a growth story.

On the flagship, juniper asked the right thing. Get the delivery dates and unit mix on both projects under construction and ask what the sponsor assumed for concessions in the lease-up year that overlaps them. I have seen preleasing velocity at a strong school drop for exactly one season and recover, which is survivable at a 5.2 only if you have the reserves to eat a flat year.

jessreyes12 · Answer

Dumb question that I have wanted to ask for a while. At $148k a bed on the flagship deal, what would that same building trade for as regular apartments if you stopped leasing by the bed. If the answer is close, the flagship risk is mostly about the price you paid and not about the school. If the answer is half, then both of these deals are single-school bets and the only difference is how much you are being paid to make one.

A 5.2 cap at a flagship against a 7.3 at a growing regional, and which risk is worth owning

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