Student Housing May Face Price Deteriorating Selling Spree in 4Q 09

By Anuradha Kher, Online News EditorPhoenix–While the student housing sector has so far been a safer bet than conventional multifamily, industry professionals are becoming more and more uncertain and even highly suspect of this idea, acknowledging that student housing may not be as recession resistant as was initially believed.Cap rates for student housing increased approximately 100-150 basis points between the summer of 2008 and the first quarter of 2009, which is nearly half of conventional multifamily cap rates (which increased 150-250 basis points). However, student cap rates are extremely vulnerable to an upward spike in the fall of 2009, which could raise student cap rates to the same level as conventional cap rates, according to Kevin Larimer, associate partner at Hendricks & Partners and Paul Dietz, partner, at Hendricks & Partners, who recently released a report on the national market for student housing. Dietz and Larimer are also concerned about a price-deteriorating selling spree in the last quarter of 2009 caused by a drop in enrollments in this sector and other factors.If student housing turns out not to be as “recession resistant” as many believe, and student occupancy drops across the nation, there will be many troubled student assets hitting the market this fall. Once lenders receive the September rent rolls and assess the damage, they will exert pressure on the owners to sell these assets. Further compounding the problem, the leasing of student housing is an “all or nothing” proposition. If student occupancy is low in the fall, the property will become a troubled asset for the entire year. Another factor that might cause the selling spree is the proposed 25 percent increase in capital gains taxes from the current levels of 15 percent to 20 percent and the 35-39.6 percent increase on carried interests. The third reason is that the current meltdown impacts student housing less than other types of real estate assets. Consequently, many owners of student housing properties are considering selling them and using the proceeds to save their more troubled assets.Larimer and Dietz also believe that as other assets suffered losses following last September’s economic meltdown, student housing remained relatively untouched as it was already leased; contracts were signed, occupancy was locked in and operations could remain on automatic pilot for the rest of the 2008-09 school year. This is the reason that student housing has not suffered the same operating turmoil that has taken place in conventional multifamily housing. But for the 2009-2010 academic year, national trends in the leasing of student housing will depend on:University Financing and Its Impact on EnrollmentHistorically, when the U.S. economy has gone into a recession, student enrollment at universities has gone up significantly. But, in our current situation, we cannot necessarily depend upon these returning students as a source of increased occupancy because, even if these students should emerge, state-funded universities across the country are grappling with severe budget problems. As a result, universities must find a way to supplement these deficits or lower their expenses quickly while causing the least harm to their current students, faculty and staff. In the past this has been accomplished by dropping the college’s freshman enrollment and then allow this drop in enrollment to roll through for four years. If universities do this, the likely result is a net decrease in the demand for student housing nationwide beginning in the fall of 2009.High School Demographics and Freshman Enrollment In recent years, demographics have shown high school graduating classes growing in size, and we have seen and have come to expect a commensurate increase in college freshman enrollment. However, in 2009, when our country will see some of its largest senior classes ever graduating, there is no certainty that this will translate into a banner year for freshman college enrollment. No one can say what potential 2009 freshman students will do in today’s confusing economic times.