January was a busy month for Houstonbased Sterling University Housing, the off-campus apartment arm of The Dinerstein Cos. that has developed 37 properties and managed more than 23,000 student beds since its founding in 1997. In the first week of 2011 alone, Sterling announced the sale to a state pension fund of a 196-unit, 722-bed student housing community in Tampa, Fla., at 98 percent occupied. The firm followed up the next day by announcing the purchase of 4Eleven Lofts, a 96-unit, 342-bed student housing community in Ann Arbor, Mich., at 100 percent occupancy. Both deals moved at an undisclosed price.
“Last year, we sold three deals on the student side, made two acquisitions, and capitalized five new, ground-up developments," says Dinerstein and Sterling partner Brian Dinerstein of a fractured but steady student housing deal space that has seen less distress than market-rate.
“The deals have just held up better,” Dinerstein says. “There wasn't as much oversupply, and the business isn't as dependent on household creation. You can argue that the student business is resilient during challenging economic times, and I think to a large extent that's true."
For The Dinerstein Cos., transaction and development action in student housing is all about market delineation and meeting the back-to-school recessionary housing demands of larger colleges and universities along with a growing recently graduated millennial set with similar housing expectations. “Every year, our two businesses of off-campus student housing at Sterling and infill urban core apartments from Dinerstein seem to get closer connected," Dinerstein says.
One of the primary shared characteristics between marketrate and dorm life in that regard is a thirst for sustainably constructed rental communities. Despite recessionary constraints on the relatively higher costs of certifying green building efforts, The Dinerstein Cos. remains committed to the U.S. Green Building Council's LEED (Leadership in Energy and Environmental Design) certification program. “We have about $700 million worth of student and conventional product completed or under construction that is built to LEED Silver standards," Dinerstein says.
Financing for student housing is also remarkably similar to that on the market-rate side, at least for core market deals, particularly those that qualify for the 10,000-beds-or-more threshold commanded by Fannie Mae's DUS Dedicated Student Housing Mortgage Loan program, which also requires a student resident population of 80 percent, a distance within two miles of campus, and a parental or gainfully employed guarantee to 12-month effective leases.
“We typically follow the Fannie criteria and don't go to schools under 10,000 beds because the capital markets just aren't there yet,” Dinerstein says. “For core acquisitions on a deal financed through Fannie or Freddie, you're looking at 70 to 75 percent as a debt service coverage restraint. The deal we bought in Michigan was lower levered than that, but that was by design."
Regardless of in-place assets or communities coming on line, absorption for Sterling is still continuing unabated, making the prospect for additional deals in the next 12 months all the more appealing. “This August, we'll complete new jobs at the University of North Carolina– Greensboro and a second phase at the University of Florida,” says Dinerstein of communities set to come on line in 2011. “Both of them and our property at the University of Alabama are leasing up toward full occupancy."