Valuing properties with potentially high vacancy rates

[Jeff Sadosky]

Am looking at a potential opportunity in housing near a university that, if fully rented, kicks off a 15% COCR and 8.5% cap rate (and there are leases in hand that would keep it fully rented for the next 18 months or so). The rub, however, is that there has been some recent building in the area and there is what seems to be a short-term oversupply of housing, which has driven vacancy rates up to 15% or so in some of the local neighborhoods/complexes.

So when you look at it from a close to worse-case scenario and run the numbers for it being 3/4ths or half rented (4 1bdrm units), the COCR drops to 2% or goes into the hole, respectively. Compounding that is the fact that it is a property targeted at students, which means that if not rented by August, you likely have empty units until the spring semester. Now, since it is a relatively cheap property, the out of pocket costs caused by 50% occupancy for a few months would not be a problem financially, carrying that would be fine, but it would impact the overall return on the investment and limit the ability to move into other investments.

How would you value a property like this, given the wide swing in potential returns.  Run the numbers at a 15% vacancy rate, as that's the neighborhood average, even though the property would never have that sort of vacancy rate, or run it at a 25% rate and only offer what makes it work with that amount of rent coming in?  Or walk away from the market until the oversupply shakes out?  

Thanks in advance for any thoughts.