WATERLOO, ONTARIO—Student housing is such a hot item that investors of all stripes have been looking to get into the sector. Everyone from institutional players to REITs to high net worth private investors has put capital into the product. Now, there’s an opportunity for individual investors to get in on the action on a smaller scale.
Toronto-based In8 Development is wrapping up work on a purpose-built student housing project in Waterloo, Ontario that is comprised entirely of condominium units. Launched in January, all 58 units of Sage Condos sold out in a matter of days, and the firm is gearing up to kick off a second phase this fall.
The project is believed to be the first of its kind in the student housing business. In8 president Darryl Firsten sums up Sage Condos’ premise in one tagline: “It’s smart and it’s easy. It’s smart as a real estate investment because you know who your tenants are and where to find them. Student housing is not a trendy market that’ll go out of style. It’s easy because we make it efficient and feasible for buyers to invest in purpose-built, new construction product in a triple-A location.”
Firsten and his partner, Paul Rygielski, have been active in the student housing sector in Waterloo—building, leasing, managing and sometimes selling properties—for the past decade. On his own, Firsten has also bought single-family homes and rented them out to students for the past seven years. “Over time, I’ve looked at all the problems with the properties and it’s that they really weren’t built to sustain the kinds of pressures that students put on them,” he says. “They’re not very energy efficient, not structurally sufficient and they’re not efficient to manage—at least, not as efficient to manage as apartment buildings.”
So the concept for Sage Condos was born out of that. “We knew there were investors out there who wanted to get into student housing, but only one or two units,” he relates. “This is an opportunity for them to get into the new construction market without having to buy an entire building.”
On the outside, the building looks just like any other condominium community. But there are several differences that make them ideal as a student housing investment. The structure is traditional concrete, but the developer utilized a technology called Insulated Concrete Form, which is very popular in Waterloo (and the US and Europe) but not as common elsewhere in Canada. Particularly in student housing, there are advantages to using ICF. It’s a system of formwork for concrete that stays in place as permanent building insulation. In short, the Styrofoam blocks act as the structure’s form, and concrete is poured in between them. Yet unlike a traditional building, where the form would be taken down before studs are put up and then covered with drywall, the walls are put up against the layer of insulation.
This system makes the structure more energy efficient and soundproof than traditional buildings, and improves structural integrity. “It also allows us to build faster,” says Firsten. “It’s more student-proof, or crazy behavior- and party-proof, than traditional buildings. Pretty much, you can’t punch through the wall; you’ll end up with a broken hand.”
The developers took other measures to increase the resiliency and longevity of the units for investors. For instance, the floors are laminate, which is easier to maintain than wood or carpet, and the kitchen counters are granite, which looks like stone but is more resilient than marble. “We tried to make sure the units are high end and durable, yet nicer than most student housing out there,” Firsten says.
As for amenities, the developer says, “it’s a delicate balance. They’re nice amenities for a student housing project, probably better than almost anything else out there. But it isn’t necessarily as good as what you’d get in a high-end condo building.
“Our primary buyers are investors,” Firsten explains. “They want to make sure their tenants are enticed to stay, but they don’t want to pay for extravagant features that will inflate the rent past the point of economic viability.” The community features, for example, a social room and gym, but not a swimming pool, but that’s because Wilfrid Laurier University, which sits some 300 meters away, just opened a new athletic center with a state-of-the-art Olympic pool. “So do the tenants at Sage need a swimming pool in the building? Do they want to pay an extra $100 or so in rent to have one? Probably not.”
The residences, which sold for $359,900 for a three-bedroom unit and $549,900 for five bedrooms, will bring in pro forma rents of $2,200 and $3, 500 per month, respectively. After expenses, taxes and fees, investors can expect a return of 14.22% for three bedrooms or 16.49% for a five-bedroom unit.
The rents, says Firsten, are “at the higher end of the market. We’d like to believe this will be the nicest building built to date in Waterloo.” Even so, he adds, “we’ve analyzed it against other buildings in the market, and we’ve projected conservative numbers, given the quality of the building and its location.”
Investors may manage and lease the units themselves, or buy into the third-party services In8 offers. Firsten reveals that every single buyer of phase 1 opted into the management package, provided by Domus Student Housing Inc., an experienced property manager with which in8 negotiated a bulk deal. Buyers can also opt for one of several furnishing packages, and a leasing guarantee offers free property management services for the first year, with the promise that the units will be fully leased at projected rents for year one.
With the demand for such units in Waterloo, it’s very likely that those rents will be achieved. According to the latest figures available from the Region of Waterloo Planning, Housing, and Community Service, the City of Waterloo had a total student population of 28,890, 20,240 of whom lived off campus, in 2010. Firsten estimates the region’s current post-secondary student population at around 45,000. Waterloo, referred to as the Tech Triangle of Canada, was named the World’s Top Intelligent Community 2007 by the Intelligent Communities Forum. Sage Condos is located equidistant from the area’s main universities—University of Waterloo and Wilfred Laurier—and Conestoga College and the University of Guelph are also in very close proximity.
“The location is kind of a hot pocket for student housing in Waterloo,” says Firsten. “The universities are growing, as is the percentage of students who need housing, both Canadian and those who come in from overseas.”
The first of the Sage Condos will open on Sept. 1, 2013. The second phase will launch soon, though Firsten won’t reveal too many details. “I can say it’ll be bigger, better and more exciting,” with a range of unit layouts and prices, he comments. “We believe we took a lot of time to understand the buyers in our first phase, then took their comments and insights and embedded them into the design of our second building.”
Is there a chance In8 would bring this concept across the border? It’s a possibility, albeit remote—for now. “We’re pretty conservative, so we don’t like to bite off more than we can chew. We want to make sure we’re able to properly deliver our first and second phases before sticking our fingers into other pies,” says Firsten. But, he adds, “it’s hard to tell what the future will bring.”
By Sule Aygoren Carranza