COVID-19’s Impact on Student Housing Under Review: Q&A
“Since the start of the pandemic, all data points for student housing have been positive,” says Cushman & Wakefield's Travis Prince.
Although the hospitality and the student housing sectors were probably the hardest hit by the health crisis, many student housing professionals say that the sector hasn’t been that affected by the pandemic. One reason would be that students are eager to go back to on- or off-campus housing instead of staying home with their parents.
Executive Managing Director of Student Housing Capital Markets Travis Prince and Senior Vice President of Higher Education Brian Reyes broke down the reasons why overall the student housing industry “has remained relatively strong across most markets, especially the larger Tier 1 Power 5 universities,” as Prince said.
How do investors view the student housing market now, roughly six months into the pandemic?
Prince: Since the start of the pandemic, all data points for student housing have been positive. Summer collections far exceeded expectations, preleasing was delayed but ended on par with or superior to last year for well-positioned assets. In most university markets, occupancy levels outperformed expectations for fall 2020. Where there has been underperformance is in markets with a high concentration of international students or where universities announced plans for 100 percent virtual learning.
That said, on-campus dorm de-densification helped drive better performance in the private PBSH market. Student housing owners are pleased with the sector’s resilience. New acquisitions are way down, however, as many investors have paused acquisition activities until 2021 in order to let the pandemic play out a bit longer. Those investors who are still interested in acquiring are running up against nonexistent debt market and institutional equity, which is being more cautious and very selective.
What are investors’ biggest challenges?
Prince: An investor’s biggest challenge at the moment will be the ability to secure permanent financing on student housing investments.
Reyes: The pandemic has created significant impacts on the traditional “college life” for students across various categories of their perspective, including:
Academic Program Adjustments
- Class registration changes—based on whether specific courses are live instruction or online format, students have had to consider fall 2020 class schedule changes in order to maintain their on-time graduation progress but schedule classes that are better suited for online format. Such changes can be unbalancing student course loads per semester or not easily aligning with a productive class schedule and creating a burden.
- Study abroad programs—most have been canceled for student/faculty safety and some students may not be able to reengage, given the timing of when these programs are offered and where these fit into respective students’ planning.
- Reduced internship opportunities—a key area of supplemental learning is the opportunity for outside the classroom, real-world experience. Certain internships that would require physical interaction have been put on hold, which reduces the aggregate opportunities for students to participate in.
- Connection with classmates/clubs/activities—many classes are conducted in an online format, restricting physical team interaction and collaboration, which is a significant part of the campus learning environment. This also impacts engagement with student clubs and activities where interactions can be limited to virtual or remote connections. Perhaps one of the most profound impacts is the sharp lack of on-campus student housing. Student housing traditionally provides a strong collection of social interactions, practical people skills development, and connection to the institution and campus community. Without this population on campus, social life changes dramatically. Many students state this as the biggest negative change to their desired “college experience” and crave this part of their time with a university or college.
- Connection with faculty—students can certainly reach out to their professors virtually, but the sense of personal one-on-one connection is different for many students across most majors. Additionally, for students with majors requiring physical performance training, the lack of face-to-face training/mentoring is a significant “miss” in experiential learning.
- Physical/mental health challenges—many factors related to COVID-19 are placing strains on the physical and mental health levels of students across the country. Physically, some students have contracted the virus and are dealing with the recovery and related isolation. Mentally, students have reported challenges with quarantine life and the restrictions on connecting with classmates and friends. Stress levels have raised due to lack of physical interaction, group events, school functions and other activities.
- Family economic impact—most families have experienced some form of change in financial stability resulting from the economic shutdowns, work furloughs and job losses resulting from COVID-19. There is greater short-term and long-term need for financial aid support to address cost of tuition, housing and other expenses. If the need for financial aid cannot be met through existing school or government resources, this creates either the need for increased student loan requirements or potential “gap” semesters or years until family financial situation can be improved.
- Work-study/part-time work limitations—students that supplement financial or parent aid with work-study or part-time work have been impacted due to the reduction of these types of work opportunities. For schoolwork study income, when campuses close, only those jobs that can be performed virtually can be conducted. Another key source of part-time work is retail establishments surrounding campuses, and most have either conducted layoffs, restricted hours, or have closed completely. The opportunities to support supplemental income has been reduced significantly.
How will investors be impacted in the short and long term if universities switch to online classes this year?
Prince: Over the last 60 days, we have seen the start of the fall 2020 semester across the country with universities choosing to carry out classes either online or in person. Many students are still motivated to move back to college markets and live in off-campus student housing properties despite their university’s guidelines for the semester.
How will rents be impacted if students return to campuses, but more single-bed units will be needed in order to contain the spread of the coronavirus? Would student housing still be profitable for investors?
Prince: The majority of de-densification is happening at on-campus dorms/apartments. Schools that have implemented a de-densification program have actually seen higher occupancy levels and higher rents for purpose-built apartments off-campus. In many cases, assets that are struggling with occupancy levels and rental rate declines were struggling with this pre-COVID-19.
Who can get a loan today?
Prince: Recently, the agencies have further tightened standards on student housing lending and there is very little support in the CMBS market. There are significant debt service reserves needed to secure a loan. The agencies are putting significant weight on experience and strong sponsorship as well as the asset quality, performance, location and market. The deals that are getting financed are Class A pedestrian assets in Tier 1university markets.
In your opinion, what makes student housing a good investment nowadays?
Prince: Student housing is a great investment because it’s one of the few property sectors that has held up remarkably well throughout COVID-19 and has proven to be not only recession resilient but now a global pandemic resilient asset class. This has been proven by minimal collection loss through the first and second quarters of 2020 when the coronavirus had its strongest grip on the U.S., slower but ultimately powerful preleasing performance through summer, and stabilized fall 2020 market occupancies despite universities’ decision to remain open or offer online classes only. What we’ve known, but has proven out through this pandemic, is that the college experience is far more than just going to class. For most students, it’s about living away from home for the first time, gaining independence from mom and dad and creating lifelong friendships—none of which can happen virtually.
What are investors’ plans for when universities fully reopen?
Prince: There is tremendous pent-up demand on both the buy and the sell side. We expect the debt markets to thaw and transaction activity to skyrocket when universities fully reopen.