Slow Economy to Fuel Student Housing Demand

Berkadia Managing Director Kevin Larimer shares his insights on financing student housing assets and makes future predictions for the sector in an interview with Multi-Housing News.
Kevin Larimer, managing director, Berkadia
Kevin Larimer, managing director, Berkadia

Student housing continues to offer an attractive investment opportunity for many investors. As a result, more and more capital will continue to flow into the space, as “investors continue to recognize student housing offers arguably the best risk adjusted returns in all of real estate,” Kevin Larimer, managing director of student housing at Berkadia, told Multi-Housing News in an interview. He also revealed that more and more high school graduates become aware of the importance of college, which will further increase the need for housing.

Which markets are seeing the highest demand for student housing? Why?

Larimer: We are seeing strong demand on the West Coast, specifically in the Cal State and University of California systems. The West Coast has trailed the rest of the country for purpose-built student housing and many of these universities have experienced strong enrollment growth. We are marketing assets at Sacramento State, Cal State San Bernardino and Long Beach State that are receiving strong interest from the investment community as they recognize the demand from students for affordable housing options close to campus.

What are the major trends in student housing this year?

Larimer: The most significant trend has been the continued inflow of foreign capital into the space. This flow has been focused mainly on core student housing in Tier 1 markets, which has compressed yields to historic lows for core student housing. Due to the low risk profile for core assets and the sector’s defensive nature, we do not expect this flow of capital to wane in the near term.

How have residents’ needs changed in the past few years, and what do you anticipate going forward?

Larimer: The needs haven’t changed much, though students have become more knowledgeable consumers. They want to be close to classes, have a sense of community with their neighbors and be able to easily access the centers of social activity. The most critical component for any student housing community is the fastest and most reliable internet service.

What type of student housing amenities are proving to be the most in demand this year?

Larimer: The most popular amenities are fitness centers, study spaces and resident life programming. Today’s student is very health conscious. By offering on-site fitness centers, students can take a break from studying and class by going for a run or lifting weights. Some properties even have studios for yoga or spin classes on the property.

Another popular amenity is study space, whether individual or collaborative. Some student housing management companies have started offering speakers series. Local entrepreneurs will come and talk to the students or they’ll host workshops for preparing your resume. Helping the students develop a real-world skill set has been well received by residents.

What can you tell us about financing student housing projects? How has the process changed in the past few years? What do you expect going forward?

Larimer: The financing process over the past few years has remained fairly stable for student housing. Permanent lenders continue to focus on borrower and management strengths as a top credit enhancement on a new student loan. These lenders also greatly prefer properties within one mile from campus and major schools. Tier 1 school loans have been dominated by the GSEs (government-sponsored enterprise) and life companies. Tier 2 schools have been financeable, but primarily with additional equity injection or via CMBS. Construction loans have become more cumbersome in recent years. Getting construction financing above 75 percent has become challenging, as has finding and entitling land sites lenders want to lend on.

Going forward, the most obvious headwind will be the potential of rising interest rates. Lenders continue to pursue the student housing space, but rising interest rates and stagnant cap rates will drive down loan proceeds with debt service coverage ratio restrictions.

What are the main challenges in the student housing market?

Larimer: The sector has seen amazing growth over the last 10 to 15 years, but most of the growth has really focused on the top 10 to 15 percent of affluent students. The sector needs to expand its target market to serve more than just the most affluent students. Developers and investors that can focus on modernizing off-campus housing in a manner that allows them to target the middle economic population will have more potential residents from which to draw and less competition from other housing providers. There is a huge portion of the student population that has been overlooked by most of the development over the last 10 years.

What are your predictions for the student housing market?

Larimer: There is another increase in college age population on the horizon and more high school graduates understand the importance of college. Additionally, historically when the economy slows, more people stay in or go back to college, which increases the demand for housing and makes the student housing sector a great defensive play against an economic slowdown.

Image courtesy of Berkadia