The flight from Capital to quality in student housing
After the biggest disruption in recent memory, funding for the acquisition and development of student housing has made unmistakable, albeit uneven, strides forward. At the start of the 2020-21 school year, many commercial banks, life insurance companies and other lenders were hesitant to return to the market.
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Since transactions hit their lowest point in January 2021 following multiple corrections to occupancy, rent listings, accommodation and rent payments, investors and lenders have moved slowly. The reopening of schools, combined with real estate performance and the collection of rents, offer encouraging signs.
“Student housing capital markets are very liquid again,” said Ben Roelke, Dallas-based executive vice president with CBRE’s debt and structured finance practice and student housing specialist. This applies to the permanent financing of existing properties as well as to the financing of construction, while the leverage increases a bit and the rates tend to fall slightly..
While government-sponsored businesses continue to be selective, strong, regular sponsors will find banks and life insurance companies competing for ongoing funding assignments on busy student housing properties in tier markets. 1.
In April, CBRE closed three acquisition financings representing a 50% increase over a typical April. Given the volume of transactions this spring driven by pent-up demand, Roelke speculated that the fall, typically the busiest season for student housing transactions, could be twice as active as usual. .
Stocks continue to show a slight pullback, especially foreign capital, which has been squeezed by travel restrictions. “This allows some of the national institutions that have been defeated by these groups to be able to acquire some of the deals that have been offered to date,” noted Chris Epp, general manager of Walker & Dunlop based in Austin, Texas.
Although capital for student housing is more available than it was at the end of 2020, investors are finding that financing at attractive rates remains a challenge. Lenders are demanding higher debt service, according to the most recent Yardi Matrix student housing report. Rental growth remains positive at 1.3% but has steadily declined during the pandemic. Pre-rentals for fall 2021 were 37% in January, down 4% year-on-year, according to data from Yardi Matrix.
Berkadia’s student housing team has reported an increase in requests from lenders for detailed information about a college’s enrollment, occupancy, and financial health. The best and widest debt options tend to coincide with the best market locations. High-credit borrowers will benefit from greater flexibility and attractive interest rates, as well as the opportunity to explore potential additional agency loans. Class B communities with a strong operating history are also sought after by lenders. Debt funds are likely to be more expensive, but can also offer a higher loan-to-value ratio, while life insurance companies generally offer the lowest interest rates and the lowest LTV.
Update on investment
Overall, there has been a flight to quality among lenders to the Power 5 state-backed top schools as investors target assets on campus and those within a mile radius. “A lot of household names are the ones that are really sweeping up new products,” Epp said.
With the scarcity of offers in 2020 offset by the number of buyers, prices for class A student housing have increased and capitalization rates have fallen for the seventh year in a row. For mid-market properties, there have been few price discoveries as there have been few sales, Epp noted.
Cap rates on class A assets fell to a record high of 5.01% in 2020, while class B rates fell only slightly to 5.75%. Class A cap rates are expected to remain at historically low levels this year and could drop below 5.00%. Until campuses open in the fall and clarity improves around pre-letting, accommodation and collection restrictions, leverage will continue in the 65% range.
The South East and South West will continue to receive the lion’s share of buyer attention. Assets are generally cheaper in these regions, which will also be the strong points for deliveries. On the development side, the Southeast accounts for 38% of the pipeline beds on track for delivery in 2021, followed by the Southwest with 16%, reports Walker & Dunlop, which forecasts a drop in deliveries of nearly 30%. nationwide year-over-year.
Investors are cautious of the Pacific Northwest, California and the east. In those regions, the rise of e-learning and stricter guidelines for returning to campus are holding back rental growth and pre-rental, according to data from Yardi Matrix.
Fannie Mae and Freddie Mac have become the primary lenders for the acquisition of student housing, although they continue to scrutinize performance and sponsorship. According to the Walker & Dunlop survey, 59% of respondents believe Fannie Mae and Freddie Mac will be the main source of debt for student housing acquisitions this year. Although GSEs forced student housing borrowers to set aside 12 months of operating costs in escrow, the reservations were largely unnecessary as operations remained consistent, Roelke noted.
When GSE funding is not available for a long-term loan, banks, life insurance companies and CMBSs step up to fill the void, noted Dave Borsos, vice president of capital markets at the National. Multifamily Housing Council. For development finance, the most likely source is a regional or local bank offering a loan-to-cost ratio as low as 55%, he added.
Assuming the project meets all targets and the lease progresses, borrowers can move directly to permanent financing from the original lender or identify an alternative source of capital, such as a debt fund. Borrowers are required to put more equity into their transactions because underwriting protocols will not allow them to overwhelm properties with debt, Borsos noted.
Where traditional lenders remain selective, more liquidity enters the market from alternative sources such as debt funds and mortgage REITs. These lenders are actively competing for acquisitions and refinancing of student housing, even those who may have experienced an operating problem or a comparable problem.
Amid a flight to quality and the focus on Tier 1 schools and recurring sponsors, there are opportunities in Tier 2 schools for borrowers with good relationships with lenders. Atlanta-based bSidePartners has been working to secure funding for Prox, a 486-room student housing complex across from the Gainesville campus of the University of North Georgia. The funding was almost in place by early 2020 when the pandemic struck and the bank loan that had been put in place failed.
In addition to stopping initial funding, the pandemic has increased the cost and availability of materials. “It required me to be creative in the way I buy my gear,” said Stephen Klee, director of bSidePartners. The company has three warehouses full of materials it bought in liquidation. “I’m going to build this project for less than anyone can build it, and it’s going to be fine,” he said.
By the spring, Klee’s team were back at the business table, ready to sign 50 percent LTV, pulling $ 3 million off their balance sheet and going to the market to syndicate the remaining $ 12 million. required.
Klee was able to secure bank financing amid the pandemic to purchase 14 acres of land next to the Prox for future development. “Banks hate mortgage loans,” he explains. He therefore created value by dezoning it, bringing 45% of equity capital to it and providing personal guarantees. He attributes his success to his 15-year relationship with the lender, Banque Synovus.
Read the June 2021 issue of MHN.