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Student housing and other niche markets lead the way in 2011.

Some real estate investors may be going back to school in 2011.

With core real estate markets continuing to struggle, investors are looking to niche markets, including student housing, for growth potential.

By comparison, core real estate markets are plagued by the weak economy and more than $1 trillion in underwater CMBS loans. This hasn't stopped many investors from paying pre-recession prices as real estate comes back big as an investment.

But those core market purchases will probably look much less attractive in five years or so, when interest rates will likely have risen. Why Niche, Why Now?

In this climate, niche markets are attracting more interest and some are poised for significant growth.

One niche market in particular, student housing at public universities, is driven by the escalating costs of private colleges and favorable demographics. The trends support a growing need for student housing.

For example, the percentage of all students in the United States who attend public universities is nov," at 79 percent, according to the U.S. Department of Education, National Center for Education Statistics. Kayne Anderson Real Estate Partners ("KA") expects that this will top 80 percent in the next few years.

Across the US, many state schools are on a sustained growth trajectory. Moreover, while state budgets continue to be hard-hit across the US, higher education enjoys broad political and public support.

From an investment standpoint, the student housing sector is highly fragmented. The top 10 owners own less than 3 percent of the total stock of off-campus housing, according to ARA National Student Housing Group, which spells opportunity for the right type of investor. However, while investment interest in the niche continues to grow, student housing is not a passive investment.

Requiring highly specialized knowledge, intensive operations and asset management, student housing doesn't lend itself to a direct investment model.

A Trend with Staying Power

Student housing requires active participation and partnerships. Building and managing student housing involves numerous operational issues, including annual tenant turnover of approximately 65 percent and an average tenant age of 21, in addition to the specific requirements of students, ranging from security to Internet bandwidth.

Partnerships between investors and owners, operators and developers are giving student housing a boost.

As the market recovers from the sharp decline in 2009, these partnerships have become more common and are now one of the defining business models in the student-housing sector.

In some instances, investors acquire existing assets from owners/developers and form strategic partnerships, which have numerous advantages for all involved.

For owners and developers, speed, certainty of close, and confidentiality are critical. A few well-capitalized investors have the ability to provide capital as a bridge if a loan falls through, as well as an accelerated lending timeline.

The developer, free of the need to raise capital, can focus on the planning, construction, marketing and lease-up for current projects as well as new projects. In turn, investors benefit from the operational expertise and market knowledge that operating partners/developers bring to the table.

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With the interests of the investors and the owners/developers aligned and the joint commitment to a long-term relationship in place, potential stumbling blocks can be more readily negotiated.

This strategic partnership model is illustrated by a venture between KA and The Edwards Companies, a large Columbus, Ohio, developer, owner and operator of conventional multi-family and off-campus student housing.

In May 2010, KA acquired The Province at Louisville, a premier student housing asset developed by Edwards and one of the largest transactions in the student housing sector in nearly two years. The property, a garden-style community of 266 units and 858 beds, serves students attending the University of Louisville.

Concurrently, KA and Edwards formed a joint venture to develop The Province at Greensboro, which will be a 696-bed property to serve students at the University of North Carolina at Greensboro, capitalizing on UNC-Greensboro's strong enrollment growth.

Once completed, The Province at Greensboro will be just two blocks from campus and the off-campus housing closest to the school's academic buildings.

Looking into our crystal ball, we believe that the overall economy will continue to struggle in 2011.

Nevertheless, certain niche real estate sectors, including student housing, will continue to thrive, driven by continued enrollment growth and barriers to entry.

BY AL RABIL, MANAGING PARTNER, KAYNE ANDERSON REAL ESTATE ADVISORS
COPYRIGHT 2011 Hagedorn Publication
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Comment:Student housing and other niche markets lead the way in 2011.
Author:Rabil, Al
Publication:Real Estate Weekly
Date:Jan 5, 2011
Words:722
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