Student Housing Q&A with Timothy S. Bradley, Founder, TSB Capital Advisors
Student housing demonstrated its resilience in the face of COVID-19 challenges, but what can the industry expect going forward? Timothy S. Bradley, founder, TSB Capital Advisors, and principal, TSB Realty, sat down with Finance Insight to discuss financing and expectations for student housing in the fall of 2021 and beyond.
Finance Insight: How was 2020 for TSB?
Bradley: We were fortunate. Many observers assumed the student housing industry would be devastated by COVID-19-forced school closures and campus clusters. Instead, thanks in large part to the rational and institutional nature of our major operators, investors and lenders, the industry proved its resiliency once again. We were affected by the pandemic, of course, and had to adjust some of our early year projections, but TSB companies still closed on a total transaction volume of approximately $4 billion, including construction loans, stabilized term loans and interim loans, as well as sales, and joint venture partnership consultations. There will be other challenges our industry faces in the years to come, but it’s difficult to imagine a more challenging singular event than the one we experienced this year with COVID-19. All things considered, we felt very good about 2020, and we’re even more optimistic about 2021.
FI: What types of financing are available for student housing borrowers in today’s market?
Bradley: Student housing capital markets are liquid. Banks and life companies are back and competing for term business for well-occupied student housing properties in good locations, such as Power 5 schools with strong sponsors, but leverage is in the 55-65 percent of value range with attractive pricing for floating and fixed-rate options. Agencies have been quoting and closing on student housing transactions, but almost exclusively with repeat borrowers. Unlike the banks and life companies, the agencies are still requiring COVID-19-interest reserves to be posted by the borrower at close. Other lending sources that are competing on student housing financing today are debt funds and conduits.
Construction lending is another story in today’s market. Banks and debt funds are the primary sources of construction financing and the market was tough in 2020 with most of the major money center banks on the sidelines. While we were successful in arranging financing for our top development clients, most of the active regional banks were requiring syndicated deals pre-close. Thus far in 2021, we’re seeing some major money centers thaw on student housing construction financing, and we are optimistic that interest will continue to grow as more universities announce plans for re-opening in-person in fall 2021.
The main takeaway for us is that relationships and student housing experience are still the most dominant factors for the lending community in assessing student housing debt opportunities today.
FI: What should borrowers with properties in second- and third-tier markets expect?
Bradley: Candidly, flight to quality has been underway for a few years now, and it’s only been further emphasized under recent circumstances. The properties that continue to do best in the current climate are well-located pedestrian assets operated by experienced student sponsors in university markets with 25,000+ students.
Overall, we believe Tier 2 and 3 markets will perform consistent with previous years. That means they’ll continue to be priced at a discount compared to the Tier 1 markets and that the larger institutional and foreign investors will largely pass on this submarket of the student housing section. That said, we believe each market is unique and there will still be great opportunities within Tier 2 and 3 markets for strong performing properties.
FI: What kind of appetite will the GSEs have for student housing this year?
Bradley: The agencies’ appetite for student is still healthy for Class A pedestrian assets in Power 5 markets with strong sponsors, but pricing, interest reserves and reduced leverage/sizing (vs. pre-COVID-19) parameters are making the current environment difficult for agencies to compete with other financing options for top student opportunities. The agencies will close a healthy amount of student business this year, but we expect the total volume to decrease from its 2019 pre-COVID levels.
FI: Can you tell us about some recent transactions and if/how they reflect on the industry?
Bradley: Student housing has seen two major portfolio sales announced already this year, including GSA’s acquisition of 27 properties from University Communities and CalSTRS—a deal that TSB consulted on. We’re also working on a few other off-market portfolio opportunities. So, as with overall student housing sales volume, we expect to see more portfolio transactions closing in 2021.
In general, core pedestrian student housing is generating more attractive yields than quality market rate apartments, and in turn, investors view student as an attractive alternative. We believe this is a strong indication that student housing cap rates will continue to hold at current levels or compress further.
FI: What is your outlook on the student housing sector for 2021?
Bradley: Overall, the student housing sector has reacted incredibly well over the last 12 months under unprecedented circumstances, and we think the industry is well positioned to keep that up. One encouraging sign, among many, is in Q1 2021 the capital markets are optimistic on the sector, with many lenders and investors that took a “pause” on student housing in mid-2020 (to let the dust settle) now pursuing new student housing opportunities with the assumption that while the 2021-22 academic year may see some lagging impacts from COVID-19, the sector from an occupancy and rent growth standpoint is continuing to move in the right direction. The student housing sector has seen minimal dislocation and exceeded all expectations in the latter half of 2020. We at TSB are confident it’s poised for a big year in 2021.
— This article is posted as part of REBusinessOnline’s Finance Insight series. Click here to subscribe to the Finance Insight newsletter, a four-part newsletter series, followed by several video interviews delivered to your inbox in March 2021.