Walker & Dunlop, CBRE on Student Housing Investment
- Sep 10, 2020
There are a lot of discussions about whether universities will open, or if students will learn from home through online classes. Not knowing if students will continue to stay at home, or if they will return on campus, can place pressure on investors. “The shift to primarily online classes has caused some uncertainty in the student housing market, but, thankfully, a lot of kids are showing up to campus and choosing to take online classes close to the university,” said Will Baker, senior managing director at Walker & Dunlop. “We suspected this would be the case, based on surveys of students as well as some parents preferring that their kids start living on their own.”
Multi-Housing News reached out to Baker and CBRE’s Executive Vice President Jaclyn Fitts, to talk about how the pandemic impacted the niche’s investment sector and how will the 2020-2021 academic year look like for student housing investors. Read the full interview below to see why Baker and Fitts say that despite the whole uncertainty regarding this niche, investors are set to have one of the most active sales periods so far.
Over the past few years, demand for student housing increased significantly, but the COVID-19 outbreak generated school closures and a shift to online-only classes. How much has this situation impacted investment in the sector until now?
Baker: In the Power 5 markets, the option to live on or near campus is more readily available and this is where we are finding that Fannie Mae and Freddie Mac are most open to finance deals. Student housing properties that cater to commuter schools might suffer a bit more than the main, Power 5 markets.
COVID-19 has caused a lot of deals to be put on hold and buyers will want to know how the assets perform in the first three months of the academic year before they close, such as how the lease-up period fares. Acquisition activity over the summer has been fairly slow, but we expect the fourth quarter to be very strong.
Fitts: The on-campus market certainly has seen challenges as universities reduced on-campus density and gave refunds when closings occurred in the spring. The off-campus market has continued to perform well even at universities with virtual learning this fall. I spoke with an owner this week who stated their off-campus asset was full at SDSU even though the campus was 100 percent virtual. Many students have been living at their parents’ homes for an extended time and are eager to return to “normal”.
What can you tell us about the process of financing student housing acquisitions?
Baker: Before COVID-19, Fannie Mae and Freddie Mac loans consisted of over 75 percent of all debt in student housing space. We don’t think that has changed since the pandemic began, as the agencies continue to invest in this space, albeit at lower loan to values. Both agencies are taking a more careful look at sponsorship, making sure that the borrowers have a long track record of student housing ownership and that the loans they fund are in strong markets.
Fitts: Lenders are currently taking a more cautious stance on student housing lending due to the recent move to virtual learning at some universities. This includes lower loan-to-values and higher debt-service coverage tests than seen in previous years.
Tell us the most challenging part of investing in student housing in these times of uncertainty.
Fitts: Demand does not seem to be a problem for off-campus housing with universities de-densifying on campus. At this time, the biggest uncertainty is the availability of financing in the capital markets. Most lenders want to see heads on beds before they return to normal lending levels.
What should borrowers consider before investing in a student housing property during a crisis?
Baker: They should consider the long-term ramifications of enrollment at the university and the specific market they are looking to invest in. They should also know how to best market the amenity spaces in a post-COVID-19 world, such as wiping down gym equipment, ensuring common areas are kept clean, making necessary renovations to HVAC systems and even considering renovations, such as converting existing units to smaller format rooms—one-two beds compared three-four, for lower density.
What are the best strategies for investors in this niche during this crisis?
Fitts: We have seen many owners partner with universities to provide them additional housing while they de-densify. Building bridges between off-campus owners and on-campus housing officials should continue to pay dividends for investors.
Before the health crisis, proximity to campus was a must for attracting top rental rates and occupancy, and also ensure maximum return on investment. Is this still valid in the new economic context?
Baker: Yes, these are still priorities for investors, however, the cottage-style student housing properties—which are less dense and often further from campus—could find an increase in demand in a post-COVID-19 environment.
Are there any opportunities that investors should be aware of in view of the coronavirus?
Baker: Now, more than ever, it is imperative that the market you are investing in has a stable or increasing enrollment and not a decreasing enrollment trend, which can be devastating for a student housing property.
How have your expectations for the sector changed since we last spoke last year?
Baker: We are still cautiously optimistic that rent rolls and collection statements will be strong in major college markets. There are some negative headlines stating that students aren’t planning to go back to school, but we won’t know for sure until the fall, when we can see the data in the properties’ operating statements.
How will the 2020-2021 academic year look like for student housing investors?
Baker: It’s still too early to tell, but the fourth quarter has the potential to be one of the most active sales periods we’ve ever seen. Since there was a bit of a halt in transactions from spring through summer, there is a lot of pent-up activity and it could result in a significant uptick in sales activity.
Fitts: I believe the 2021/2022 academic year could be a year of record-setting returns for investors. With the return of gap year and international students and lowered new supply, as well as continued de-densification on campus, we are geared up to see a dynamic year in the student housing sector.
Earlier this year, Walker & Dunlop structured $293 million in acquisition financing for a student housing community in California, which is said to be the largest single loan in the company’s history. How has the pandemic altered investors’ approach toward large investments?
Baker: The $293 million transaction at U.C. Davis was closed just before the pandemic began; however, we don’t think that COVID-19 has caused investors to change their approach toward large investments. That said, because of the institutional equity that has entered the student housing space recently, there has not been a decrease in appetite for larger student housing assets in general, including portfolio acquisitions.