Same building, 5.1% cap in a big college town, 6.8% in a small one

Question

Two offerings crossed my desk in the same week and they're close to identical on paper. Both are 1990s vintage, both leased by the bed, both roughly 100 beds, both about half a mile from campus.

The first sits at a flagship with about 45,000 students and enrollment up every year for a decade. Asking price puts it at a 5.1% going-in cap. Rent per bed is high, occupancy has been 97 or better, and there are three new buildings under construction within a mile.

The second sits at a small private college of about 3,800 students in a town where the college is the largest employer. Going-in is 6.8%. Occupancy has been 94, rent per bed is a third lower, and there's no new supply because nobody would build there.

The 170 basis point spread is real money on a 100 bed asset. It's also exactly what you'd expect the market to charge for the difference between a school that will probably still be growing in 2035 and one that might not exist in its current form.

I'm curious what the room does with a spread like that. Is 170 basis points enough compensation for single-institution risk, or is it nowhere close?

priya_n21 · Answer

For what I want out of a property, 170 isn't close. The small private college case isn't a rent risk, it's a total demand risk, because if that school shrinks its class or merges, your 100 beds have no alternative user in a town that small. At the flagship, worst case is you compete on rent with three new buildings and your yield drops. At the small college, worst case is the building is worth land value. I'd want the spread closer to 400 to think about it, and even then I'd probably pass.

jordan_ellis2 · Answer

Marlow, the new supply at the flagship isn't nothing though. Three buildings within a mile of a 1990s vintage asset means you're the value option, and being the value option at 5.1 going-in leaves you no room if the new product opens with two months free. The small college has a moat, which is that nobody will ever build against you. Ledger, do either of those towns have a second employer or hospital that could absorb the beds as ordinary apartments?

Same building, 5.1% cap in a big college town, 6.8% in a small one

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