Off-Campus Student Housing is Providing a COVID-19 Lifeline for Major Colleges
While colleges across the country grapple with COVID-19, the "recession-resistant" off-campus student housing sector is facing unprecedented uncertainty — but is surprisingly optimistic
The crown jewel in Walker & Dunlop’s sizable loan originations book is a deal backed by a student housing property.
In late February, the publicly traded multifamily finance behemoth originated a $293 million securitized mortgage — the largest single loan in its history — for borrower Landmark Properties to acquire Sol at West Village, a 663-unit property with more than 2,200 beds located in Davis, Calif. It’s so close to the University of California-Davis it could be mistaken as part of the campus.
Not long after origination, the COVID-19 pandemic ramped up in the U.S. and colleges began to shutter. Will Baker, a senior managing director at W&D, started getting calls.
Baker, who’s originated more than $3 billion in student housing debt in his career, first fielded calls from the loan’s purchaser Fannie Mae and then from W&D’s CEO Willy Walker, who wanted to inquire about the status of his firm’s largest-ever mortgage and the outlook for the university it relies on.
“Our CEO called me and said, ‘Will, this is the largest single loan our company has ever done. What’s going on with the University of California system?,’ ” Baker said. “I called Landmark and asked what they were hearing and they said, ‘We’re not worried at all.’ ”
Baker said Landmark had been on the phone with UC Davis discussing master leasing some beds at the property.
“The same day that the Cal State [school system] announced it was going fully online for the fall], UC was trying to lease more,” Baker said about the mid-May announcement from the California State school system, which includes colleges like the massive California State University-Fullerton. “That’s a good microcosm of what’s going on. We need to prepare for the [uncrowding] of the freshman dorm situation.”
As college administrators across the country grapple with COVID-19 and what the future of their institutions will look like — enrollment projections for many are down now and many are also concerned about declining revenues — the off-campus student housing sector has become somewhat of a lifeline for both colleges and students, and many owners and operators are relishing it.
Sol at West Village is the type of student housing property that lenders salivate over, an amenity-rich development bordering a university that is geared to target and benefit from a rich revolving supply of prospective tenants produced by that one university. (It just so happens to also be right next to a separate community college.)
Student housing has historically been characterized by some as “recession resistant” because of the theory that when there are economic downturns, people decide to invest in themselves and prioritize their education in hopes it will propel their job prospects. No one preaching that message could have imagined a scenario that would see college campus life wiped out for months on end — and possibly for the foreseeable future.
“What I’m hearing from operators and fund managers I know in the space; there was cautious hope, which has turned into cautious optimism, which has turned into optimism in just the last few weeks,” said Jake Reiter, the president of real estate investor Verde Capital. “It’s day-by-day and week-by-week in real time, which is different from any other asset class.”
The class of May 2020 that had occupied many units at these properties graduated into a pandemic-stricken economy that’s now registered more than 40 million jobless claims in less than three months. And existing and prospective students may see college life upended completely, unsure whether they will even be able to walk their campus’ grounds and enjoy its amenities by the end of the summer — let alone figure out where they’ll live or if it’s even necessary to leave home.
Still, many colleges across the country are planning to reopen for the fall semester, with several having already announced that they’ve swung their doors wide open, like the University of Notre Dame in South Bend, Ind., or the University of Utah. As of May 28, about 65 percent of colleges have indicated that they are planning for in-person courses in the fall, according to data from around 830 schools being tracked by The Chronicle for Higher Education.
Presidents at public junior colleges are much more averse to the idea of resuming classes than their counterparts at public and private four-year schools, according to a survey from the American Council on Education (ACE) that’s polling 310 college presidents across the country.
“Not only has the opening or reopening of universities given us more certainty about our cash flow or distributions for this year, the equity and debt markets have a keen eye on that,” Reiter said. “Three months ago you couldn’t buy student housing — pricing was so aggressive — and a month into this, you couldn’t sell it. And just in the last week or two, interest is starting to pick up again. We’re signing leases as universities announce they are opening.”
“The winners will be projects that organically have that social distancing built into it,” Reiter added, referring to properties such as those with shared units that each have their own bathroom or other units that are built for a single occupant.
Student housing is a smaller sub sector of the multifamily space that represents just 8 percent of all existing non-agency multifamily CMBS debt, according to data from research firm Trepp. While it’s struggled with poor loan performance, it’s reported record levels of lending and investment activity over the last two years. Despite its relative “recession resistant” label and the historically robust yields it produces, many in the multifamily sector choose to stay away from the inherent volatility of student housing — wary of things like severe oversupply, management concerns and constant leasing turnover and the headaches these create.
“Overbuilding at campuses, with a leveling off of student enrollment, has caused supply to weigh on parts of the market,” said Manus Clancy, a senior managing director at research firm Trepp. “The cycle is binary for these guys. It’s like flying. Once an airplane lifts off, you can’t put another passenger on board. They have this [leasing] window of four to five months from maybe as early as November to the time students leave in May. Once kids leave, there’s not much activity for private student housing; the cake has been baked and you’re left with what you have.”
“[Operators have] lost two critical months of padding that [leasing] number,” Clancy added. “There’s no [real] idea whether attendance [in the fall] is going to be 70 to 90 percent of what it had been, so you’re left with that uncertainty and also whether schools will open at all.”
Because of this, COVID-19 has sparked a swift overhaul of both on campus and off campus student housing around the country’s largest schools.
Industry participants and observers who spoke to CO said that there is fundamental change on the way because social distancing has become key and healthcare and safety have become paramount. Because of this, many colleges have begun rethinking the layouts of their on-campus dormitories, moving away from the traditionally cramped spaces, bunk beds and communal bathrooms where freshmen are typically housed, and they are now looking to expand beyond their borders to meet demand.
“Double-occupied on-campus freshman dorms are done, and they don’t want that anymore,” Baker said. “There’s a big need for schools to say, ‘Where will we put freshmen? Let’s master lease 500 beds at a property because we have to put our freshman somewhere, and they want their own bathrooms and bedrooms.’ That could create an increase in demand.”
Owners and investors with properties located under a mile from campuses are set to do well, according to Billy Meyer, a managing director of real estate lending at Seattle-based Columbia Pacific Advisors, a private lender who dabbles in student housing. Many industry players told CO it’s the off campus housing supporting smaller private schools and lesser known institutions in secondary and tertiary markets that will more than likely experience greater, and extended, pressure from COVID-19.
Reiter said that he has a student housing property near the University of South Florida campus in Tampa and that his group has been contacted by the university about potentially leasing the entire asset.
“The project we own has purely organic social distancing means; a number of units are actually singles, not dorm-like,” Reiter said. “The university is talking to us about master leasing the entire project. It has to meet a number of criteria. But whether a sports team takes it or the university leases it out [another way], it doesn’t matter, because economically, we’re fine.”
Baker said, “it’s a great way for operators to lease up their properties. If you’re within a quarter mile and walkable to class, you might get a phone call [from the college].”
To mitigate fears, many schools have announced different strategies, including starting the fall semester early, eliminating a “fall break” in October and then wrapping up the semester by Thanksgiving, which would keep students from traveling for two holiday breaks; The University of South Carolina has floated this idea. Still, questions go unanswered about general sentiment from students and their families.
As it relates to existing liquidity in the space, Fannie Mae and Freddie Mac, of course, are at the forefront supporting the sector, approaching deals much more conservatively than they otherwise would.
The agencies have been “pulling back on leverage,” Baker said. “They used to go up to 75 [percent] and now your best bet is 65 percent, and they’re certainly being selective.”
Reiter said the changes in terms and structure from the agencies “have been coming very frequently in terms of holdbacks, LTV, [interest-only] periods, [among others]. We keep weekly tabs on it.”
Baker said that the agencies typically consider schools with a student population of 10,000 or more but have shifted to “top-tier institutions right now. They prefer to see schools with 25,000-plus enrollment — with growing enrollment — understanding that it’s not going to be what it was [pre-COVID-19]. They want to be in major schools, with staying power, that have state funding.” Those include targeting assets near “Power 5” schools — public research universities with athletics in the top five sports conferences in the NCAA.
The agencies have instituted debt service escrows “where they’ll hold the money longer to get them into the fall of  to make sure the pandemic doesn’t [have an impact that far down the line],” Baker said. “[The agencies] believe the optimism but have a wait and see approach. [We’re] still doing some refinances but most acquisitions have slowed down to a crawl; borrowers want more certainty on cash collections situations.”
“The overall capital markets for this are great because [interest rates on] agency debt [are] in the low-3s right now,” Baker added, saying that many borrowers wonder if that will be the case come this fall. “If you can withstand the debt service escrow, there are options for you.”
For some private lenders in student housing, the formula is obviously a bit different as they’ll be in position to facilitate an eventual long-term financing once the smoke clears.
Columbia Pacific’s Meyer said that his firm is currently vying for a bridge loan opportunity for a student housing property a few blocks away from a major university in Ohio.
“Just a few weeks ago, the borrower rented out 20 or 25 units to the [university] for one of the sports teams,” Meyer said. “We got pricing and a term sheet out there and they’re still shopping around. It’s brand new construction that’s still in lease up that was 30 percent occupied as of three weeks ago.”
“We’re seeing more deals coming in than usual, and there’s a heightened sense of volatility in the student housing market. But volatility is when private bridge lenders get the most phone calls — when things go up and go down or with any change or disturbance. [Borrowers] want to go faster to execute their plan and get refinanced out quickly,” Meyer said. “It’s either bridge to agency or bridge to conventional [loan] or [the borrower doesn’t] really know what they want to do yet because of how things are unfolding right now. There’s no real certainty yet.”