The seller, a private capital investor primarily investing in student housing in the southeast part of the country, had been marketing and operating two student housing properties, Summit at Railroad Square and Summit at All Saints, as Florida A&M University assets. Traditionally, Florida State students stayed on the north side of the railroad tracks, while Florida A&M students stayed to the south. The seller took notice of the extraordinary amount of gentrification taking place over the past few years, including upscale landscaping, roundabouts and well-lit walking trails. Both properties provide walkability to the two university campuses, breweries and the numerous lifestyle amenities within Florida State’s College Town District.
The owner had been making such good returns on the properties that they really had no intentions of selling. They also didn’t think their target pricing was anywhere near achievable. But they wanted to provide an affordable option to the Florida State student body in the College Town submarket, while offering the number one amenity, walkability to classes and nightlife. This meant students could live in a renovated unit and still save money. The CBRE team created a business plan with the idea to essentially redefine the southern boundary of Florida State’s campus in the College Town submarket of Tallahassee, an area which would not have historically been considered a desirable place to live. While the seller was content operating the properties as Florida A&M assets, given their low basis, the CBRE team knew if they could prove the demand, it would enable the cap rate to compress to a level that would allow the seller to achieve their target value. The biggest challenge was proving there was a demand for affordable product in an area which had not yet been considered by Florida State students to live.
The seller had purchased the properties about 18 months prior at a very undervalued price. When CBRE was engaged*, it was really to discuss if an opportunity would even exist, given the high pricing the seller wanted to achieve. The client’s motivation for the sale was to act on an opportunity to realize significant short-term gains and for one of the partners to finally have skin in the game on the equity side for their future deals. While discussing ways to maximize value, the CBRE Investment Sales team was challenged with putting together a business plan in order to get even remotely close to the seller’s pricing expectations. The opportunity that CBRE and the seller mutually discovered was that given today’s market, a lot of buyers are compressing their going in cap rate largely dependent on what the upside and proforma cap rate is.
The properties were currently catering to Florida A&M’s student population in Tallahassee, where the rents typically trail those of Florida State by up to 50%, even though the university is just across the railroad tracks, approximately 0.1 mile away. The overall sales price, per bed, follows a similar trend. Properties at Florida A&M would sell for around $30,000/bed, while properties at Florida State would sell anywhere from $40,000/bed to values north of $100,000/bed. CBRE was given the opportunity to create a business plan, as long as it could be proven to be feasible, to create the first Florida State focused student housing deal south of the railroad tracks and the recently developed College Town District. At the same time, the 10-year treasury rate was continuously increasing. The later change of direction in the 10-year treasury would end up proving to be a major challenge that the CBRE team would need to overcome in order to account for additional defeasance.
The CBRE team leveraged their unique university connections and conducted a survey in conjunction with the Florida State Student Real Estate Society in order to prove the business plan’s feasibility. The survey offered the ability to get very granular, including questions on living preferences, commute and rent sensitivity. The resulting data was outstandingly in favor of the business plan to convert the properties from Florida A&M to Florida State student catering properties. The team put the pro forma as a Florida State property with the buyer purchasing it with around 85% occupancy of Florida A&M students. Simply taking a different university marketing approach, and lightly renovating the properties, resulted in a rental increase of $200-$250.
The team knew that traditional student housing firms wouldn’t typically be looking at these types of deals that aren’t the brand new, higher quality assets with a current focus on a “Tier I” university. However, the sheer reach of CBRE benefitted the seller, as the team has both student housing and a deep history of conventional expertise. They were able to diversify the types of investors looking at the portfolio beyond just student housing players who may have a little higher of an appetite for risk and the potential returns associated with it. They were also able to leverage the fact that many conventional multifamily investors are increasingly pursuing student housing assets to better diversify their own portfolios.
The buyer, a private investor out of Southern Georgia, had been looking at another student housing deal the CBRE Investment Sales team was marketing, but the property did not fit his criteria. The team decided to introduce him to the Summit Student Housing portfolio. His former expertise primarily dealt with LIHTC and conventional multifamily properties, and this was his first time directly investing in student housing. He was able to find value in the CBRE Debt & Structured Finance team who acted as an advisor early on, as well as the market research and local market knowledge provided by the investment sales team. The market reports that CBRE Research produced also helped the buyer’s investors become more comfortable with student housing and were strategic in helping to solidify the capital raise to buy the deal.
Originally, the seller had been making such good returns on the portfolio that they really had no intentions to sell, but because of their local knowledge and expertise, the CBRE team was able to create and validate a business plan that turned their target value into a reality. The seller had purchased the properties at around $37,000/bed and was able to sell twelve to 18 months later at around $65,000/bed. By nearly doubling their money, it allowed all the partners in the firm to move forward into future properties with true skin in the game. Since closing, the buyer has already rebranded the portfolio and realized substantial rental increases.
*Disclaimer: The relationship with the seller and the business plan formation began while the team was at Marcus & Millichap. The sale occurred while the team was CBRE.
Summit Student Housing Portfolio