DBRS Morningstar Report Looks at Student Housing Market

A report cites uncertainty over whether the surge in online college and university classes will impact more than $13.3 billion in loans packaged in CMBS.
Securitized student housing CMBS loans. Chart and data by DBRS Morningstar

Continued volatility in the student housing market is expected due to uncertainty over higher education plans for the upcoming fall semester and may impact more than $13.3 billion in student housing loans packaged in commercial mortgage-backed securities, according to a new report from DBRS Morningstar.

“The Next Falling Domino: Student Housing” report notes the move to distance learning that occurred in March when most U.S. colleges and universities shut down their campuses because of the COVID-19 crisis is likely to continue in some fashion this fall. Several, including California State University, the nation’s largest four-year college system, have already announced they plan to hold most classes online.

Many are unsure whether they will be mostly online or offer a hybrid and are waiting until June or July to firm up their plans leaving students and their parents hesitant to commit to student housing properties. The DBRS Morningstar report states off-campus student housing properties could be “inadvertently affected in the near to medium term by the move to online only classes.”

Part of the problem is students are unable to tour properties and may be holding off on signing leases until their respective universities make their decisions. Other factors impacting student housing properties could be some students who decide to take a gap year rather than take online classes and international students who are unable to return to the United States for classes this fall.

Ben Margolit, co-founder & CEO of Rentgrata, a renter insights platform that connects prospective and current residents of multifamily properties, including student housing communities, said students are waiting for final word from their universities. But he predicted a “mad dash” to lease once that word comes.

“Generally our clients are pretty optimistic about what the fall is going to look like,” said Margolit, who noted his firm works with almost 200 student housing properties across the U.S. representing more than 100,000 beds.

Part of Rentgrata’s services is its messenger app which connects prospective tenants with students who already live in the properties to get more information about the assets. Margolit said that feature is more important this year because many of the students did not visit the sites before schools shut down and are only able to take virtual tours.

Growth in Demand

Demand for student housing properties grew in recent years along with the increase in full-time undergraduate enrollment, which jumped 27 percent between 2000 and 2017 from 13.2 million to 16.8 million. As the new properties were built, developers added more amenities, including resort-style pools, fitness centers, lounges and collaborative study areas. DBRS Morningstar reports agency and CMBS loans also increased as investors’ appetites for student housing properties grew.

DBRS Viewpoint notes there were 667 nondefeased student housing loans outstanding as of May, totaling $13.3 billion. The report states there were only 12 loans, totaling $229.9 million, securitized in 2010. That number had increased to 169 loans, totaling $4 billion securitized in 2015. Since 2015, the securitization of student housing loans has declined to an annual average of 87 loans, totaling $2 billion, each year between 2016 and 2019. While the number of loans has decreased since 2015, the average loan size has increased to $29.8 million in 2019 from $23.4 million in 2015 due to larger projects with greater construction costs.

“The combination of increased supply and construction costs led to higher debt amounts per bed over the course of the past decade,” according to the report.

Delinquencies, Special Servicing Rise

DBRS Morningside notes some student housing properties were facing headwinds before the pandemic, including oversupply issues, decreasing international student enrollments and expanding on-campus residency requirements. The delinquency rate for student housing loans increased from 0.2 percent in January 2018 to 3.8 percent in April 2020. The rate increased to 9.5 percent in May, when campuses shut down leading to broken leases and rent collection issues at some sites. The volume of specially serviced student housing loans rose from 1.7 percent in January 2018 to 4.6 percent in April. As of May, 29 student housing loans, totaling $653.7 million, were in special servicing.

Delinquent over time by outstanding balance. Chart and data by DBRS Morningstar

Agency lenders, like Freddie Mac and Fannie Mae, have announced some forbearance and are allowing owners with government-backed mortgages to defer mortgage payments but those measures are not covered in private-label CMBS deals. The top five states for private-label student housing CMBS are also the states that have been hit hardest with COVID-19 cases: Texas ($413.8 million); New York ($304.6 million); Michigan ($263.1 million); Illinois ($261 million) and Pennsylvania ($242.1 million).

There are also two single-asset/single borrower deals with exposure to student housing properties: a $330 million pool of assets in Austin, Texas, and $481 million deal backed by 43 properties across the Midwest and South. Student housing properties can also be found in commercial real estate collateralized loan obligations (CRE CLOs). As of May, there were 19 loans totaling $292.39 million securitized in CRE CLO transactions. CRE CLOs often involve transitional properties that are seeking to be stabilized. The properties are at greater risk of loan default if their business plans can be realized.

The report also notes there are about $1.14 billion student housing loans that will mature between 2020 and 2021, including about $948 million of which are CMBS loans. “Replacement financing during the ongoing pandemic for upcoming maturing loans could pose challenges, as these properties face stressed cash flows and possible value decline,” according to DBRS Morningstar.