Does a purpose-built deal near a mid-size school pencil if the school is 40 minutes from any major city

Question

Looking at a 64 bed property, 2008 construction, about 12 miles outside of a mid-size state university in central Pennsylvania. Enrollment around 11,000, been pretty flat for six years. The ask is $4.2M, current NOI sits around $285k so the cap is just under 6.8. I keep getting stuck on the location because the school isn't in a real college town, it's surrounded by a lot of nothing and the nearest city with any economy is about 40 minutes away. That matters to me as a contractor because I can get crews out there, but it also means if enrollment slips the tenant pool doesn't have anywhere else to go and neither does my building. There's no spillover demand from young professionals or anyone else who'd rent a bed near that campus. The whole thing stands or falls on one school staying healthy and I don't know what gives me confidence on that when the enrollment number hasn't moved in six years.

pavelk88 · Answer

Six years of flat enrollment at 11k is actually not the worst sign at a mid-size state school in PA. The ones I worry about are the ones showing 3 to 4 percent annual bleed, because flat can mean they found their floor. But the cap rate is the problem here, not the location. Sub-7 on a single-demand-driver asset 40 minutes from anything is pricing it like it has diversification it doesn't have. I funded a draw schedule on a 48-bed purpose-built in a similar setup outside a school in upstate New York, 2019 vintage, and the sponsor had to eat a 14-month lease-up that nobody underwrote because one dorm came back online after a renovation delay. That kind of event risk doesn't show up in trailing NOI and the seller's broker isn't going to flag it.

The thing I'd want before getting anywhere close to committing is the actual by-bed lease structure and what percentage of those 64 beds are on individual leases versus house-style leases with one guarantor. If a fraternity or athletic program is absorbing 20 of those beds on a group lease that's one phone call away from blowing up your occupancy by 30 percent. I'd also want to see whether the school has any on-campus housing mandates for freshmen or sophomores, because if they expand dorm capacity even modestly at 11k enrollment that directly compresses your tenant pool. At $4.2M I'd be at $3.6M or walking. The return doesn't justify being this exposed to one institution with no relief valve.

Does a purpose-built deal near a mid-size school pencil if the school is 40 minutes from any major city

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