Tempe, Ariz.–Pierce Education Properties is well known for its knack for swiftly transforming underperforming student housing assets into big successes, but the company is hardly averse to filling its portfolio with premier stabilized properties, as evidenced by its most recent transaction. PEP joined forces with clients of Switzerland-based private markets investment management firm Partners Group to acquire Block 1949, a top-of-the-line, 640-bed off-campus community serving Arizona State University in Tempe, from JLB Properties for $52 million.
Occupying six acres at 1949 E. University Dr., Block 1949, which JLB Properties completed about one year ago, sits 1.5 miles from the ASU campus. Block 1949 is not your traditional off-campus apartment complex. It provides students with high-end and progressive accommodations. The four-story building’s 225 fully furnished studios, two-, three- and four-bedroom units–including 10 live-work loft residences–feature such amenities as granite counter tops and 42-inch flat-screen televisions. Other offerings include a pool with cabanas, a state-of-the-art gym with iPod docking stations, an Internet café with coffee bar, a putting green and a dog park. And then there’s the aqua massage room. It’s the student housing destination of tomorrow. There is also an attached parking facility with 532 spaces.
Block 1949 is not distressed. It is presently 96 percent occupied. And, as Partners Group points out in a press release, “The investment offers an attractive cash-on-cash return in excess of 10 percent per annum with upside from rent growth due to limited supply against growing enrollment.”
Commercial real estate services firm Holliday Fenoglio Fowler L.P. marketed the property on behalf of JLB and represented both the seller and the buyers in the transaction. Additionally, the firm orchestrated $38.5 million of CMBS debt financing from Deutsche Bank Securities Inc. for PEP and Partners Group’s purchase of the asset.
Investors are quite keen on student housing properties. “It seems that the only constant in 2010 was the darling status that the student housing industry continues to enjoy from the investment community,” ARA National Student Housing Group notes in a year-end 2010 report. “From a macro perspective, student housing continues to outperform other asset classes due to strong long-term fundamentals. Based on U.S. Department of Education projections, college enrollment is expected to rise 10 percent between 2008 and 2017 to over 20 million students. As a result, investors continue to flock to the space in search of higher yield and strong market performance.”
Unlike most sectors of commercial real estate, student housing can weather economic storms. “It is a very recession-resistant asset class,” Fred Pierce, president and CEO of PEP, tells MHN. “It has performed exceedingly well during the economic downturn. There are more students in college in the 2010/2011 academic year than there ever have been. There has been an increasing desire among people to get graduate degrees, and what do people do when they get laid off? They go to school.”
Despite widespread investor attraction to the sector, PEP did not face an overwhelming amount of competition in its bid to acquire Block 1949. “There is probably about $1.5 billion in purpose-built student housing assets available for sale at this moment, but university housing operating companies, which are the best buyers for this asset type, aren’t as active, and the large REITs aren’t as active,” Pierce says. “They’re not acquiring with the insatiable appetite of the mid-2000s. But it’s going to be a short window. Significantly more buyers are going to come in for core assets. Within the next 12 to 24 months there will be much more liquidity, but for now, there’s much less competition.”
Competition or no, PEP continues to mine the country for opportunities. “The top 80 markets, those are the markets we want to be in,” he says. “We look at schools with an environment of 15,000 students and preferably with Division One athletics where students are more involved in the university. When you overlay the 15,000 enrollment and Division One, the net catches around 80 markets. Demand will always be there for the best-of-the-best universities.” In terms of property type, PEP is seeking out “Class A, purpose-built student housing properties with super outstanding amenities packages.” Earlier this year, the company partnered with Harrison Street Real Estate Capital on a $43.5 million deal to buy Palms on University, an off-campus community in close proximity to the University of California Riverside. The premier 607-bed property is highlighted by such extras as a tanning salon, a pool and spa and approximately 16,700 square feet of retail space. “We acquired more than $120 million of student housing assets since August 2010. Our business plan is to acquire $200 million in 2011, and we are on the path to doing that. If we’re not the top buyer in the market right now, we’re among the top two or three.”