Deal of the Month: Nonelective Auction Tests Strength of Student Housing
A no-frills, 50-unit complex at Ohio’s Youngstown State University — formerly sold back to the bank in a sheriff sale after its developer’s fraudulent dealings — once again was fated to the auction block this past fall. With declining enrollment and some hair on the property, a team of multifamily brokers at Marcus & Millichap had to rely on the fundamentals of tertiary market student housing, which they say are strong.
Though there was nothing ostensibly wrong with the property itself, the 113-bed Flats at Wick in Youngstown had a cloud hanging over it for years after its developer, Dominic Marchionda, pleaded guilty in August 2020 to multiple counts of tampering with the property’s records. The charge was part of a larger bribery scandal involving public officials that was uncovered not long after the property was built in 2010. After going back to the lender, U.S. Bank, late last year, the asset then landed in the lap of a special servicer.
Highly motivated to clear its books rather than hold on to the property and operate it any longer, the seller wanted Marcus & Millichap to take the asset to auction in October. A team that specializes in market rate multifamily in Ohio, led by first vice president investments, Will Koontz, hadn’t dealt much on the auction block, but ultimately won the listing because of its solid track record as the market experts when it comes to selling in Youngstown, Koontz told LoopNet.
The property generated plenty of offers, he said, but none hit the reserve — so the servicer cut it down from $5.6 million to $4.2 million and moved forward with a buyer to close at $4.4 million on January 20. The entire process from “absolute day one” of marketing to its closing taking just around 100 days, Koontz said.
The buyer, an individual investor from out of state, had 30 days after the winning bid to seal the deal, Koontz continued, but used two formal extensions to put up additional earnings money.
“It’s an interesting play,” Koontz said, “because the university’s enrollment had been trending downward year over year for the past two decades — but the housing inventory is declining, and students still need a place to live.”
The university’s enrollment has declined by about 14% since 2010, according to data from LoopNet’s publisher, CoStar, down to around 8,700 full-time students. The student’s dormitory capacity hovers just under 1,000 beds, and the off-campus inventory of purpose-built and multifamily units within a 20-minute walk to campus falls short of 3,000 beds. Occupancy hit 99% just before the pandemic and has shrunk to around 96% since. Purpose-built student housing beds average a rental rate of $714 per bed, which is nearly 70% higher than the average rent for market-rate multifamily units near the university.
There’s always going to be a need for student housing in university towns , Koontz continued, and there will likely be a continued need for conversions of existing student stock into other residential products. A student housing play like this could go either way, he noted. Though the Flats at Wick are best suited to Youngstown students given its location within a 5-minute walk-time to major campus hubs — including its proximity to athletic facilities, which has been a big draw for student athletes — Koontz said that the property has the potential to be converted to other uses.
The units themselves are modest, ranging from between 622 and 866 square feet in 1- to 4-bedroom models, respectively. The building has a laundry room, fitness center, clubhouse and 100 parking spaces on site.
“It’s really convertible, and I wouldn’t be surprised if the owners were to convert it to senior or quasi-senior housing or to market-rate apartments. You will see an increasing amount of student housing stock at tertiary universities with declining enrollment numbers increasingly being converted to market rate, because they are still in industrious cities with jobs and even growing populations.”
Youngstown is a great example of the type of tertiary market where many buyers are turning their attention, Koontz continued. “A lot of investors are struggling when chasing yield in urban cores, and we’re seeing an astounding amount of out-of-state capital come into Ohio. Out-of-state capital is exploding into Midwestern cities and their more tertiary markets, like Cleveland and Youngstown, in chase of yield."
Buyers looking to these tertiary markets might not be getting the “appreciation play,” he said, “but they are going to get stabilized cash flow in a value-add opportunity, and that’s what everyone is looking for now — getting the most bang for your buck.”