Joe Stepchuk’s GSE Background Helps Greystone Boost Student Housing Lending Volume
The student housing sector continues to benefit from strong investor and consumer demand. Total annual deliveries nationally have averaged approximately 47,000 beds this cycle, according to data research firm RealPage.
Proximity to campus is a major differentiator in student housing, as properties closer to campus historically have greater pre-leasing velocity and higher rents. Industry experts say that despite the current wave of construction, most college students live in dormitories or in rental housing near campus that weren’t designed to house students. That means the sector still has room to grow.
During the recent MBA 2019 Commercial Real Estate Finance/Multifamily Housing Convention & Expo in San Diego, REBusinessOnline sat down with Joe Stepchuk, managing director of student housing lending for New York City-based Greystone, to gain his insight on the state of the market. Stepchuk joined Greystone in 2016 from Fannie Mae, where he served as director for 10 years and oversaw $3 billion in annual multifamily loan production.
As a father of five children, including twins, Stepchuk is also a consumer of student housing. One of his children attends the University of Florida in Gainesville, another is at Xavier University in Cincinnati.
REBusinessOnline: How did 2018 play out for Greystone in the student housing sector in terms of deal volume and overall velocity of activity?
Joe Stepchuk: I came over from Fannie Mae in 2016, where I specialized in student housing.While I also now do conventional multifamily lending with both agencies (Fannie Mae, Freddie Mac) here at Greystone, our student housing lending volume has grown over the last three years. We’re happy with the growth and we want to keep that going. We’ve more than doubled our student housing volume over the prior year.
REBO: Is there any trend, issue or deal that stands out from last year?
Stepchuk: We’ve been active in properties that have an enrollment of 30,000 students all the way down to 7,000 or 6,000. The ability to execute something lower than an enrollment of 8,000 students is actually a big plus for us. The agencies, Fannie Mae and Freddie Mac, have a cutoff of 8,000 to 10,000 students, so it’s an interesting challenge to make those deals work.
Coming into Greystone with the background I have is very helpful — having the knowledge to talk to the agencies about student housing and having developed relationships with stakeholders on all sides.
REBO: What have you learned most about being on this side of the business (direct lender) as opposed to being on the other side as a government-sponsored enterprise (GSE)?
Stepchuk: You really feel the competition more on this side. As the subject matter expert, I’m helping the origination teams secure business. You have to respond quickly, accurately and appropriately in order to structure the best bid. That pressure is extreme. It’s exciting, but it’s extreme. It’s fun being that close to the deal. It’s like being on the field versus watching from the coach’s box.
REBO: But not all those answers come quickly, right? For example, commercial real estate lawyers tell me that they ask their clients if they want the “A” answer or the “C” answer. If the client wants the “A” answer, it’s going to take a little more time, they point out. In your case, is it simply that you don’t have that much time to wait for the “A” answer?
Stepchuk: You really don’t. You’ve got to make fast decisions and we’re comfortable with that given my background. You combine internal resources with external comps, public data and market knowledge to provide the best quote. But at the end of the day, it still has to be proven in underwriting.
REBO: You talked earlier about the population thresholds. Is there a formula to all of this from a risk perspective?
Stepchuk: In smaller schools there is less of a tenant base. If there is new supply, or the school suddenly requires more students to live on campus, the effects on occupancy are noticeable. This is less of an issue where enrollments are large, but even they are not immune to oversupply.
REBO: Is there a sweet spot for Greystone in terms of loan amount or type of loan in the student housing space?
Stepchuk: No, we’re comfortable doing it all and we have done it all. In this space, you have an operating business behind the bricks. You really need to be attuned to the experience of a borrower, which is key in this type of housing. Investors are attracted to the returns in this sector, yet they must realize the needs of tenants in this space differ some from a conventional property.
For example, sufficient bandwidth (Wi-Fi) is needed for tenant access to libraries (homework and research), and on their downtime they need it for gaming or streaming media. You also need to have security, which especially provides comfort to parents. The days of tanning beds and pools are being replaced with fitness centers and learning centers (co-living style).
REBO: What’s driving that practicality?
Stepchuk: It’s what the student wants, and quite frankly what the parent likes to see. Students need an environment that helps them succeed — comfortable housing and appropriate amenities. Also, if the comfort is provided with furnished units, this makes it easy for parents to drop them off with necessities versus having to obtain, haul and unpack furniture.
REBO: What is your read on the overall health of the student housing sector?
Stepchuk: As with any situation, you have some markets that are overbuilt and some markets that still need newer supply. Old product needs to be replaced. Schools also face increasing budget constraints, leaving the private sector to supply the necessary beds.
It doesn’t all have to be Class A; that becomes a pricing issue for some. But you can still have a property within a half-mile of campus that has enough amenities and provides clean, safe and affordable housing. There are opportunities at every price point.
Overall, the sector is still in the growth mode and I’m optimistic.
REBO: Is there a market you won’t enter?
Stepchuk: No, yet one needs to be alert to sponsors’ experience and market supply. If oversupply exists, you need to be careful on leverage and location.
REBO: What have you learned most as a consumer of the product?
Stepchuk: A lot of properties are offering furnished units. I can drop my child off and not have to worry about lugging furniture and a mattress. That also helps the owner by preventing dents in walls stemming from the moving process. Online user payments are also helpful.
REBO: There are instances where colleges and universities require sophomores to live on campus. What’s the significance of that for the student housing industry?
Stepchuk: If a school’s current housing policy is for freshmen to live on campus, and then at some point sophomores are required to live on campus, there is a significant loss of potential tenants. For example, in a school of 8,000 students, your potential pool of tenants shrinks from 6,000 to 4,000 — a 33 percent decrease. I haven’t seen this happen recently, but on occasion it has, and occupancy levels have suffered.
REBO: Is it a surprise for everyone involved when that occurs?
Stepchuk: It depends on how much information is conveyed or available, how in tune with the university a sponsor may be. But there is risk in any business.
REBO: Is the majority of student housing that Greystone finances off-campus, on-campus or a combination of the two?
Stepchuk: Typically off-campus, but we also see on-campus financing on university-owned land with an agency where there is a public-private partnership. In that case, a private entity will run the property and enter into a ground lease with the school, but we’re not seeing a lot of that right now.
REBO: By all accounts there’s currently a lot of capital flowing into student housing. What risks does this pose?
Stepchuk: New investors coming in may not truly understand the nuances of the sector. Unless they’ve teamed up with an experienced third-party manager, a lender may offer a lower leveraged loan until they gain experience.
In a conventional multifamily deal, your property leases units throughout the year. In a student housing deal, it takes a bit more strategy for the leasing cycle — it’s cyclical and done far in advance. For example, properties can start renting in October 2018 for the September 2019 school year.
REBO: Every investor wants to be with the best operator, but how do you know you’re with the right one?
Stepchuk: It all comes down to experience, plain and simple.
REBO: A lot of property sectors have had periods where they’re robust and then fall off. It seems like student housing has been on a steady, healthy run for quite some time. Is it fair to say that this real estate asset class hasn’t had the peaks and valleys that we’ve seen in some of the more traditional property sectors, or is that a misread?
Stepchuk: That’s an excellent read on your part. A lot of the investors and owners in this sector are quick to recognize that and share that with the investing community. They say this product is recession-proof, performs well and here’s why: demographics and the importance of college.
After the last downturn, the unemployment numbers for persons without college degrees was about double of those with college degrees. That drives more people into college programs. And some people just want the college experience (versus an online degree). You also have an aging student housing stock to boot that’s now being replaced. Add all those factors together and the investors who are in this space seem quite happy.
REBO: If more capital keeps pouring into the sector, doesn’t the impressive run the property sector is currently enjoying become riskier to maintain?
Stepchuk: You don’t want a market to get overbuilt, yet it happens. These situations then tend to level off. The current stock still has room for updating.
REBO: What you’re saying is we’ve had select markets that have had their issues, but overall the health is good?
Stepchuk: From a national basis, yes, it’s good.
REBO: Does the high cost of going to college and the emergence of online universities pose a threat down the road?
Stepchuk: That question has been brought up a number of times over the years. Yes, it’s economical, but for some college is truly about the experience. They want football Saturdays. They want basketball in March. They want to get away and have their independence. I think it’s a rite of passage that still has a strong place in our society.
REBO: What do you like most about working with universities? How is working with student housing different than other property types?
Stepchuk: I don’t work with the universities per se. I’m helping owners finance properties. But when I visit college campuses, the youthful enthusiasm is everywhere. It’s a vibe that makes being in that environment fun.
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