Making Sense of Student Housing Lending and Financing

(Clockwise from top left) Ian Bradley, Griffin Cotter, Will Baker, John Manginelli, Mike Meltzer.

The investment and development worlds cannot function in the student housing industry or any type of real estate without capital and equity. This was the starting point of the conversation at the Capital Markets Update panel that took place on the third day of the National Multifamily Housing Council and InterFace Student Housing conference.

Moderated by TSB Capital Advisors Vice President Ian Bradley, the panel gathered together Will Baker, senior managing director at Walker & Dunlop; John Manginelli, Northeast regional executive at Keybank Real Estate Capital; Mike Meltzer, credit risk manager at Fannie Mae; and Griffin Cotter, director for multifamily production & sales at Freddie Mac.

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The COVID-19 pandemic has impacted the student housing capital markets—and debt, liquidity and pricing are likely to be the biggest determinants in student housing financing volume in the near term. Student housing capital experts are looking with “cautious optimism” at the fourth quarter and into 2021, despite the notable drop in financing volume over the past several months.

Eyes on Enrollment

Despite looming uncertainties, lenders are encouraged by the strong enrollment numbers for the current academic year—especially at the Power 5 football conference schools and private universities—which allowed for strong occupancy rates and rent collections, regardless of the form on education the schools opted for. “That was great to hear and gave us some comfort,” said Griffin Cotter. “There are definitely markets and property-specific assets that are just not performing as well as others, but on the whole we felt good about all the news we’ve received so far (from sponsors and borrowers),” he added.

Both GSEs have been financing student housing deals throughout since the outbreak—albeit with an overall longer-term look. “We do realize that there is some short-term risk associated to that and because of that we are looking at those really good quality transactions, whether it’s Power 5 schools or schools with really good dynamics,” Mike Meltzer noted.

Shifting Strategies

Terms for permanent financing are slightly different today than they were before the pandemic when borrowers could potentially get up to 75 percent leverage. “Now, granted how skinny cap rates are in student housing, there’s not a ton of deals that we’re actually getting to 75 percent—most of them are service-coverage constrained,” Baker said.

He also noted that lenders—just like investors—are now mostly focused on Power 5 schools and big universities (with more than 20,000 students) within big metropolitan areas, such as Georgia State University that has seven campuses throughout metro Atlanta. In addition, the sponsor profile and requirements have changed: “Now you pretty much need to be a well-established, repeat agency or client to get favorable finance in terms of post-COVID-19, and I don’t see that changing anytime soon,” Baker explained.

According to Meltzer, most Fannie Mae student housing finance deals are at 12 months of P&I reserves. These funds are generally held for one year and, if performances are met, they can be released two quarters after that year mark. In most circumstances, if those reserves were to stay in place and not meet the performance hurdles, the funds are automatically released after 36 months. “It’s a big change from prior years, but (these reserve levels) allow us to still provide liquidity for student housing despite the pandemic,” Meltzer added.

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Similarly, Freddie Mac now requires a P&I of 12 months. “We could increase or decrease it based on what we see in deals specific-wise but, generally, all the deals we’ve been closing have that 12-month debt service reserve,” Cotter said.

Speaking about construction financing, Manginelli noted that the field of loans for student housing has narrowed in the past few months. Private lenders are now looking for borrowers that are very well sponsored and long-term owners. Loan-to-cost metrics have compressed as well to 55 to 70 percent, with 70 being the exception, Manginelli said. “The debt yields are higher in terms of what we require, thus causing the leverage levels to go down,” he added.

There has been an impressive influx of institutional and foreign capital in the U.S. student housing over the past decade—mainly due to the sector’s recession resiliency. And while the current situation might be slightly different, the capital markets experts today agreed that the student housing market is well-positioned for a comeback.