The University of Kentucky is on the verge of making a move that could change the ballgame in the student housing business. Earlier this week, the Lexington, Ky.-based school put out a press release announcing that it was in negotiation with Memphis-based student housing REIT Educational Realty Trust (EDR) to take over the expansion and revitalization of the entirety of its student housing portfolio, a sizable 9,000 beds, over the next decade.

In the process, EDR would get the campus’ entire 6,000-bed portfolio to lease and manage. If the REIT won the contract, it would be responsible for replacing most of those beds and supplying an additional 3,000 over the next seven to 10 years. No other major university has handed over all of its beds to the private sector before, making this a landmark deal if it happens.

“It could be a big deal for our industry,” says Randy Churchey, president and CEO of EDR. “A university like Kentucky coming out and possibly deciding they’d like to outsource both the management of their on campus housing and then redevelop the housing with a private company is a really a big deal. I hope and expect other universities will take notice.”

Instead of taking a piece of on-campus ground and building, EDR will take over management of existing buildings on management contracts and began tearing down many of those buildings. EDR could spend as much as $500 million on new development and will control the new buildings on a ground lease. It would start a 600-bed on-campus facility next April.

“A big aspect of this was that the University didn’t want to go backwards in the number of beds,” Churchey says. “We’re building and tearing down at the same time. Each year, there’s a net add of beds. That’s a big deal.”

Big Repercussions
EDR’s competitors see the University of Kentucky announcement as a possible bonanza for the student housing business, as well. “We see this as a natural trend,” says David Adelman, CEO of Philadelphia-based Campus Apartments. “We think that other schools will follow, and we're talking to some right now about a similar deal.”

In a way, it may just be a natural evolution. Colleges have already handed off bookstores and food service to third parties. “Broadly speaking, I think it’s a continuation of a trend of universities outsourcing nonacademic functions,” says Paula Poskon, a senior research analyst with Robert W. Baird & Co., a Milwaukee-based wealth management, capital markets, asset management, and private equity firm. “I think you’ll see more major universities consider these approaches because they can’t afford to do everything. Their budgets are too crunched.”

The industry rumor mill says that schools like Ohio State, West Virginia University, Texas A&M, and others are exploring the possibility of privatizing housing. Churchey thinks if EDR does well, there will be more opportunities for student housing companies to take over on campus housing.

“The more university that have a favorable outcome should make it easier for other companies to explore the concept,” Churchey says. “Kentucky kind of burst open the door. I expect that well have other university that are interested. Most of them are facing the same issues—lower endowments, budget cuts from the state, and infrastructure that is somewhat old.”

New Contenders
While the deal has huge ramifications for the business, it could provide an even bigger boost for EDR. “For EDR I think it’s a perception game changer that they could beat ACC [Dallas-based REIT American Campus Communities] for such a huge deal,” Poskon says. “It was just two-and-a-half years ago that EDR was barely surviving as a company.”

Private firms like Campus Apartments and Birmingham, Ala.-based Capstone have the name recognition to contend for future deals and Poskon sees EDR and ACC competing for more university contracts down the because of their track record and access to capital. In fact, she thinks the desire to develop public-level capitalization and clarity to compete for college housing contracts could draw more student housing companies to the public markets.

“I wouldn’t be surprised if we didn’t see one or two more entrants into the student housing space in the next two years,” she says.

But Adelman cautions that not everyone can jump into the student arena. It takes knowledge of the landscape and patience to deal with a longer development timeline. “The real issue isn’t your ability swing a hammer and renovate a building,” he says. “It’s being able to speak the language of the university, and there are only a few of us who can really do that. You also move at a slower pace than developers traditionally like.”