Lending intermediaries are not seeing any slowdown in the availability of capital for the student housing sector in 2018. Many report that the sector is a favorite and a well-known quantity among lenders, one that they want to count among their specialties.
“Historically, student housing was viewed only as a subset of multifamily, but we have seen a distinct departure from that mindset throughout the current cycle,” says Benjamin Roelke, senior vice president, debt and structured finance, CBRE Capital Markets. “Lenders are getting smarter about student housing and are asking the right questions more often than not.”
“Our high volume construction lending relationships view student housing as a stand-alone product type and understand that each market should be evaluated on its own merits, but in uncertain times there are macro forces that can alter risk evaluation standards generally, with the effects trickling down to specialized product types,” says Tim Bradley, founder and CEO of TSB Capital Advisors.
Student Housing — On Its Own
Lenders increasingly view student housing as an attractive stand-alone asset class. Its strong performance during the Great Recession prompted many lenders to closely study and understand the sector, with many growing their lending platforms alongside strong developer clients. At the same time, many lenders have slowed their lending for all multifamily products, carefully balancing portfolios after the boom in conventional multifamily that occurred in the past few years.
“While we are being cautious on new construction for both multifamily and student housing, we view them separately since they serve significantly different segments of the population,” says Charles Williams, senior vice president and regional manager of KeyBank Real Estate Capital. “Most lenders, ourselves included, will focus on the growth and need for updated housing stock at the university in question.”
Lenders have gotten to know the market well, and seek assets that are in strong university markets with either stable strong enrollments (in Tier 1 university markets) or a forecast of enrollment growth (in Tier 2 and 3 university markets).
“We are looking for the same ‘boxes’ to be checked that most active investors are looking for — pedestrian-to-campus, 12-month leases, parental guarantees, etc.,” says Will Baker, managing director of multifamily finance for Walker & Dunlop. “The properties we avoid are school sizes below 8,000 students, community colleges and junior colleges. If the deal has a master lease to a school, sports team, fraternity/sorority, it will cause some underwriting issues as well.”
“’What university?’ is the first question the lender is going to ask,” says Ryan Welsh, senior vice president and senior loan originator, multifamily finance, at PNC Bank. “Three or four years ago, that would have been the second or third question a lender would have asked.”
Much of what has enabled lenders to understand a host of markets is better data, something the industry as a whole is getting better at reporting and delivering. [See related article on page 58 of this issue.]
“Better market data has become available to lenders to help make decisions to fund a project or not,” says Welsh. “Because lenders have access to reliable historical and current market rents and occupancy information, construction financing remains available in markets where additional supply is warranted. Similarly, it is harder to find aggressive construction financing in markets where current supply seems to be meeting demand.”
GSEs Dominate
Last year was a record year for student housing financing for the government sponsored entities (GSEs) Fannie Mae and Freddie Mac. Together they funded a total of more than $5 billion in student housing volume in 2017. Fannie Mae reported volume of $3.8 billion last year for student housing, while Freddie Mac reported a volume of $1.6 billion for the calendar year.
“Fannie Mae and Freddie Mac continue to be the most active in permanent student housing loans,” says Peter Benedetto, senior managing director of Berkadia.
The two GSEs lead lending in the sector, but they are far from the sole providers of capital to developers and acquirers.
“The agencies and life companies dominate the market for longer term fixed- and floating-rate permanent financing,” says Roelke. “Banks and bridge lenders like debt funds and mortgage REITs are providing a lot of interim financing for properties either undergoing a value-add transition or just needing a short term financing solution. Banks continue to provide the majority of construction financing in the market but we are seeing a significant demand and market share going to some of the alternative construction lenders in the market today.”
Those alternatives include debt funds, who have been getting aggressive on interim financing and other types of financing in the market.
Positive Lending Climate
Generally speaking, lenders and intermediaries are seeing a positive lending climate and steady activity as the year approaches its halfway point.
“So far, in 2018, we are still seeing a healthy agency appetite for student housing [from the GSEs], although with the 10-year Treasury rate in the 3 percent range, there may be some deals that are priced out by rate increases in the second half of the year,” says Bradley.
The concern caused by the spike in Treasury rates that the country saw after the 2016 presidential election has slowly dissipated over time, but still remains a top issue for borrowers as they plot their financing strategies. Interest rates have risen and the cost of financing is a major factor in the returns that developers and investors make on projects. Many sponsors are considering the cost of financing carefully for projects planned to open in 2019 and beyond.
“The rise of the Treasury and Libor rates is certainly top-of-mind — with an impact on loan proceeds due to debt service coverage constraints,” says Benedetto. “We see both underwriting metrics and spreads remaining rather flat for the foreseeable future. Positives are that lenders are still very interested in student housing. Permanent lenders remain active and are aggressively trying to win business. Additionally, the bridge loan space has significantly opened up, allowing borrowers to add value to their portfolio of new acquisitions.”
“Supply is always a focus, and the biggest challenge at present is the cost of projects and the market rents needed to achieve the necessary returns,” says Jennifer Molnar, senior vice president in the commercial real estate group at Wells Fargo.
That concern hasn’t slowed new development and acquisitions, however, as evidenced by the many deals SHBhas covered over the past six months.
“The appetite for product among investors is solid and there is plenty of liquidity in the debt markets,” says KeyBank’s Williams. “Strong sponsorship is, as always, the main driver. We want to have a comfort level that when the next downturn occurs, ownership will have the experience and wherewithal to weather the storm.”
— Randall Shearin