Coming off a strong year in 2015, student housing investment continues to gain momentum. By August, volume reached $5.7 billion, a 54 percent year-over-year increase that edged out the $5.6 billion tally for all of 2015, according to Real Capital Analytics Inc. Although financing for construction has slowed a bit, acquisition financing is readily available from varied sources as 2016 heads for the home stretch.
“The attractiveness of the capital has gotten better in terms of the all-in rate and other terms that borrowers are able to achieve,” said Benjamin Roelke, a Dallas-based vice president with CBRE Capital Markets. “That is just a result of the capital markets producing attractive rates. But it is also tied to the student housing asset class being (at) a point where capital providers are more comfortable with it.”
Fannie Mae and Freddie Mac are active providers of acquisition financing for student housing and lend stability to the niche. Earlier this year, for instance, Walker & Dunlop arranged $672 million in financing for the acquisition of University House Communities Group, a 14-asset, nationwide student housing portfolio. The high-powered new ownership is a joint venture of the Scion Group; Singapore’s sovereign wealth fund, GIC; and Canada Pension Plan Investment Board.
“The biggest challenge in the transaction was the size of the portfolio,” Brendan Coleman, a Walker & Dunlop managing director who worked on the deal, told MHN in July. “Assets were all over the country, some hadn’t come out of the ground yet and some were just finishing construction. Coordinating a portfolio of this size within a tight time frame required considerable collaboration around the world, because our partners were in Singapore, Toronto and Chicago.”
To make this complex set of gears click, Walker & Dunlop selected a Fannie Mae credit facility, which offers a combination of scale and flexibility. Designed for portfolios with cross-collateralized, cross-defaulted assets, the credit facility provides a minimum of $55 million, offers both fixed-rate and floating-rate terms, and is available for both stabilized properties and under-construction communities.
For its part, Freddie Mac recently provided $48.8 million for three stabilized communities near Brigham Young University in Provo, Utah: The Lodges at Glenwood, Raintree Commons and Cambridge Court. Arranged by Walker & Dunlop, each 10-year loan has five years of interest-only payments and a 30-year amortization. Freddie Mac representatives visited each community to meet the borrower and see the property firsthand, a step described as unique by Will Baker, a Birmingham, Ala.-based senior vice president & managing director for Walker & Dunlop.
Lenders, including CMBS conduits and banks, are usually willing to provide as much as 75 percent loan-to-value. Life companies are somewhat more conservative, generally lending a maximum of 65 percent LTV. Fixed interest rates could go up to 4.5 percent, while floating rates could reach 3.5 percent. Lenders usually underwrite to a debt service coverage ratio of 1.25 to 1.30, or a minimum debt yield of 7 percent. Mortgage REITs and debt funds are also lending on assets that are being repositioned and need bridge financing.
During the second quarter, average spreads over Treasuries ranged from about 178 basis points for a loan-to-value of less than 50 percent to 263 basis points for a loan-to-value between 76 and 85 percent, according to a survey of student housing lenders by Integra Realty Resources.
Banks cut back
Although banks remain active construction lenders, they have scaled back their activity and tightened their terms. Loan-to-cost ratios typically range between 70 and 75 percent; 80 percent is now less common than it was in previous years. Interest rates tend to be about 3 percent and up, based on LIBOR plus 300 basis points. Spreads have risen about 50 basis points, as lenders tighten terms. Lenders are also usually looking for debt service coverage on exit of 1.25 to 1.30, or a debt yield of 7 to 9 percent. One factor is BASEL III, which raises the bar for bank capital adequacy.
Regulations aside, a slowdown in bank lending was probably inevitable, given several years of robust lending on student housing properties and in the multifamily sector at large. “There seems to be a strong emphasis on construction dollars being allocated for existing bank borrowers,” noted Peter Benedetto, a senior managing director for Detroit-based Berkadia. “So I think borrowers would want to leverage off of their existing relationships or partner up with people that have strong existing bank relationships.”
Roelke and a Pittsburgh-based colleague, David Meese, recently arranged $86 million in construction financing for a pair of projects planned by Park 7 Group: Park Place Baylor, a 261-unit community adjacent to Baylor University in Houston, and Park Place LSU, a 277-unit development that will serve students at Louisiana State University in Baton Rouge. Three banks provided three-year, interest-only loans with extension options.
Boosted by low interest rates, refinancing of student housing assets is also healthy. “We are at historic lows, with the 10-year Treasury hitting below 1.4 percent right now,” said Baker. “I think that’s attracting a lot of people sitting on the fence about whether or not to refinance.”
These low rates have tended to compress cap rates, which have fallen below 6 percent on occasion. The low interest rates, combined with willing lenders, likely mean student housing refinancing and acquisition will stay strong for the rest of 2016.