SPECIAL REPORT: Student Housing is the Flavor of the Season

Washington D.C.--Day one of the National Multi Housing Council's (NMHC) Student Housing Conference in Washington, D.C., saw a range of presenters on various topics speaking fairly optimistically about the industry's current and future prospects.

Washington D.C.–Day one of the National Multi Housing Council’s (NMHC) Student Housing Conference in Washington, D.C., saw a range of presenters on various topics speaking fairly optimistically about the industry’s current and future prospects.

It is a fact that the student housing sector has not been impacted too badly during the recession. As one of the panelists here pointed out, the grand ballroom at the conference venue (J.W. Marriott in D.C.) would not have been packed if it were an office, retail or industrial sector conference instead.

But all those comparisons aside, it is true that the sector has been sustained by agency financing. All along, Fannie Mae and Freddie Mac have been very interested in providing loans to student housing properties. In a session titled, ‘Getting the Deal Done: How to close a transaction in the current environment,’ all that the panelists could talk about was Fannie and Freddie.

Will Baker, vice president of Multifamily Finance at Walker & Dunlop, said, “Agencies are keeping us alive right now.” Of course, they have their likes and dislikes. Even if someone has been a player in the multifamily industry, they will look at the ownership history to see if the operator has a good track record.

Baker said, “Brand-new construction loans are very hard to get right now and cap rates will remain high for a while. Location is very important; the property has to be within a mile or two of campus and on a bus line. If it’s further than two miles away, it better be a great deal (offer shuttle service, have tons of amenities, etc). If the operator hits on all or most of these things, agencies will be very keen.”

Each of the agencies also has a minimum enrollment number that the campus must have. The only exception could be if it’s a brand-name school like Duke or Notre Dame.

According to Kevin R. Larimer, national director of student housing at Hendricks and Partners, there have been dramatic swings in the past 36 months. “In 2007-08, there was a frenzy of money chasing student housing. In early 2009-10 we saw mainly distressed or value-add assets trade. In the second quarter, we started to see things change and there was a scarcity of product. Now, we have $140 million in closed transactions.” Markets continue to be volatile but if anyone thinks that 2007-08 was the norm, they are not going to do well right now, he explained. Those who realize what’s happening now is the norm, will do well.

Apart from Fannie and Freddie, HUD is also looking at student housing re-financing. Baker said if you have lot of patience, HUD might be the way to go. “It has to be one-, two-, three-bedrooms though. Terms are great, it could take up to six to eight months to get the deal done. The timing will depend on which of their offices the applicant goes to. Some of their offices are really swamped,” said Baker. HUD is a great option for someone looking at pure maximum leverage but a lot of time on hand.

John Preiss, vice president of business development at the Preiss Co., touched upon the importance of relationships while getting financing deals done. “We have some local regional banks with whom we have good relationships. But these are recourse loans, floating two-three-year deals with no prepayment,” said Preiss. The hottest deals getting done right now, according to him are bank-owned properties that are stabilized and located in a good market. “Everyone is trying to get those deals. There are 30-40 offers coming in for those properties. There is a very high level of competition for those deals and they end up trading at very low cap rates,” Preiss said.

Aside from financing, there are other factors to be concerned about. Larimer said that the biggest mistake someone could make is not doing enough due diligence. “If you aren’t already in the market, you need to spend some time there. Go and interview the students walking around. Students in different communities desire different things, and little things could often lead to big mistakes.”
A profile of sponsors of student housing and equity sources seems to have emerged in this market. According to Baker, a lot of private equity guys are out there.

Preiss added, “There is plenty of equity in the form of not just private equity but also new funds, private investors and family money.” It’s all about the operator though—if s/he is strong and has the funds locked in, they will be the ones buying student housing properties in the next few months. “Student housing is the flavor of the season,” he concluded.

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