Gainesville, Florida, could be considered the test market for student housing. How much has a flurry of development, economic woes and enrollment cuts hurt student housing in Gainesville?
Home to the University of Florida, a school known for its prized athletic and academic programs, students flock eagerly every year to the city of Gainesville. It is not only where just about every teenager in Florida wants to go to college but the university is also a huge draw for prospective students around the country. So, for many years, the university continued to grow and grow and grow, and for student housing developers there was no doubt that Gainesville was a great place to do business. Build it and they will come became a common theme.
According to Andrew Hogshead, chief operating officer of The Collier Companies, the Gainesville market began to get tight around 2005 as developers started to convert more rental properties into for sale condominiums. “In 2006, more than half of apartments were 100 percent occupied and we were raising rates 5 percent to 10 percent per year for five or so years running,” he says.
“Then the predictable thing happened. Gainesville looked like a good market to be in and so the supply started coming.”
Bill Barkwell, chief operating officer of Campus Advantage, adds, “The barriers to entry from a cost standpoint are less here than in other markets, and that, added with low interest rates and the ease in getting financing, made this a very attractive market to so many developers.” What followed was an unprecedented growth in supply, leaving a glut of student housing supply at The Swamp and simply not enough Gators to fill it.
Unfortunately, an oversupply of student housing was not the only problem plaguing the Gainesville student housing market. Simultaneously as the market became over supplied the economy began to take a nosedive.
According to Travis Prince, a senior associate at The Jackman Prince Group of Marcus & Millichap, the downturn was hard for many developers to react to. “Developers are identifying sites two to three years before they will even open their doors. Two or three years ago the University of Florida was still growing and the state of Florida, in general, had tremendous growth prospects,” he explains. “Very rapidly the economy deteriorated, the University of Florida reduced enrollment and projects that had been planned on market projections of previous years were now delivering. All of the sudden, the market was oversupplied. It was a combination of things that people could not foresee and once it materialized it was too late to turn back.” Dorothy Jackman, vice president of investments at The Jackman Prince Group of Marcus & Millichap, notes that even in just the last three years there has been approximately 4,800 beds delivered for student housing alone and around 6,700 beds for the total multifamily market.
Mark Harries, president of UCH Management Group, points out that in addition to oversupply, the trend was bringing bigger, better and more luxurious student housing and amenities to the Gainesville market. “Now as the parents see their 401(k)s disappear and many are losing their jobs, they just don’t have the money for that kind of housing,” he remarks. For many parents sending their children to college became a much more dubious affair. Harries also points out that as money got tight, views on the so-called college experience changed as well. As is common at several large state schools, many students live within 50 miles of campus, so they could logically commute. However, parents still wanted their children to have the entire college experience, which included living on or very near campus. But, Harries notes, “as the economy got worse and parents just did not have the money, it started to make more sense for students to commute.”
The state itself, which had been enjoying unprecedented growth and development as well, was hit incredibly hard by the downturn. And like many other states around the U.S, Florida was forced to make budget cuts, which meant a decrease in the funds appropriated every year for the University of Florida.
“The market is facing a multitude of issues,” says Jennifer Cassidy, a regional manager for Campus Advantage, which runs two student housing properties at Florida — The District on 62nd and Cabana Beach. “One being the state budget cuts that forced the University to decrease enrollment and at the same time as those cuts about 4,000 beds were added to the market.
Those two things happening at the same time, coupled with the general state of the economy, caused a lot of problems for this market.” However, on a positive note, Hogshead explains that although the university announced that it would have to cut freshmen enrollment by 1,000 students per year for the next four years, the school only cut enrollment for the past two years and have appeared to stop any further cuts.
A secondary issue affecting the Gainesville student housing sector is the shadow market that has increased in the area. “Much like in the multifamily sector, the shadow market is hard to measure and quantify, but it is definitely having an impact on the Gainesville market, even more so than any other market in Florida,” says Hogshead.
Cassidy explains that owners of a number of the more highly rated conventional apartments in the area were seeing their numbers decrease because of the economy; thus, they started marketing to students. In addition, condominiums and homes that private home owners were not able to sell have also been added to the rental market, all of which is wreaking havoc on the current oversupply of purpose built student housing.
Competing for Market Share
All of these factors led to what Hogshead characterizes as “flat out panic” during last year’s leasing cycle. “In order to compete, operators gave away more concessions than they needed to and gave away more free rent than they should have — occupancy fell and pricing fell further than predicted given the supply and demand in the market,” he says.
Harries adds that this reaction helped set off a pricing and concession war among those in the Gainesville student housing market, which, in turn, started to make students think differently about housing. “You start to train the student to shop and wait,” Harries explains. “Students used to make decisions in regards to where they would live in the fall after spring break, but with the pricing/concession wars the operators were training them to wait until June, July, or even August to make decisions on housing because that is when the best deals came out.” This type of reaction from both operators and students led to a horrific summer from a leasing standpoint for operators, as well as a lot of extra work to drive in and close business.
As some operators were handing out free rent and concessions such as free laptops, gift cards, Xboxes and scooters, Harries says that his firm tried to devise ways to set their property apart.
“To stand out among so many crazy concessions we put together a scholarship program to create an incentive but also differentiate our product,” he says. Students had to qualify for the scholarship with a high GPA and they had to be involved in student leadership or community service of some kind. “It helped us create a lighthouse for quality students that wanted to be a part of the community and have a stake in what we were doing versus attracting students who were just looking at what the place down the road was giving away that week,” Harries says.
Barkwell explains that his properties have remained competitive because of their focus on the student’s living/learning experience. “It is not just about the bed, the price or the concessions,” he says. “It is about providing better services to our residents. It is important to provide an experience to our students. That sets us apart.”
Fortunately, after last year’s frenzy, many operators took on 2010 with a different mindset. “People have sobered up from that nightmare and a more realistic pricing structure is beginning to return to the market,” says Hogshead. “It is still down from where it was a few years ago, but we are not seeing the frenzy of concessions and pricing of last year.”
Barkwell notes that the numbers for both of their properties in Gainesville are up this year compared to last year. He explains that they prepared for this year’s cycle much differently than last year. “Last year, we already had budget expectations based on rates set by owners across the country, but as the economy turned we had to make adjustments to price and concessions as the year went on,” he says. “This year we went in with eyes wide open and set our rates and budgets in order to be competitive in the market and stabilize that asset. The important thing is to get beds leased and make sure we have a resident base available for renewal next year.”
Cassidy adds that part of Campus Advantage’s strategy this year was to start early. “Last year we were forced to react to market, but this year we have started our renewal process very early on and set our price points to be competitive in the marketplace,” she says. Barkwell adds that as they set rates for the year, they are focusing on operating costs as well since it is also a big part of stabilizing an asset. “It is not all about rents,” he says. “We have managers that are very knowledgeable in regards to operating their properties and the costs that are associated with that as well.”
Jackman notes that overall the downturn has forced everyone to look at how they operate. “First and foremost everyone has drilled down and become a better operator,” she says. “The focus has been on improved customer service and resident retention.”
Despite the problems plaguing the Gainesville student housing sector, the market is recovering and market players agree that it will continue to show improvement. “There has been rapid decline but there is the potential to recover quickly,” says Cassidy. “I believe it could take three to five years to be strong again because of the amount of product in the market. However, the University of Florida is a tier-one school and it is where students want to go to in Florida because of the reputation of its athletics and academics. We may see the market strengthen again much sooner.”
Another possible boon to the Gainesville market is surrounding community colleges. Jackman points out that community colleges near the University of Florida are home to a multitude of students that will eventually feed into the university. In addition, as the University of Florida gets harder to get into, these community colleges become less and less your typical commuter school.
“The students that attend those community colleges want to live where the students that attend the University of Florida live,” she says. “Long-term, we are bullish on the Gainesville market in general so we have positive hope for it and think there are signs that it is beginning to trend in the right direction.”
Much of the market’s continued recovery is contingent on the fact that little to no development takes place for the next few years, a factor that is looking likely since financing has become so hard to come by. In addition, Harries notes that the current climate has made developers take a closer look at the markets. “People will have to get back to basics and really do their homework and research and work harder to be successful now,” he says. “Do your homework and don’t just assume build it and they will come.”