There’s no doubt that student housing has come a long way since its humble beginnings, successfully shedding its Animal House image and earning a reputation on Wall Street as a veritable asset class. The housing downturn further fortified that view, as student housing led the multifamily industry into a strong recovery. Moreover, capital providers that hunkered down during the downturn have a lot of dry powder to get out in the market and continue to see student housing as an attractive investment.
“The balance sheets of the banks have certainly recovered, and they have a lot of capital to put out,” said Peter Donovan, senior managing director at CBRE, during a members-only, pre-conference finance roundtable discussion. “In order for banks to maintain earnings and maintain net interest margins, they are having to lend more on real estate than they have historically.”
But the banks are not alone. As the multifamily industry as a whole has begun a solid recovery, the commercial mortgage backed securities (CMBS) market and life companies also have increased their multifamily lending, with a good amount moving into the student housing space. During a panel discussion with top student housing lenders, Mitchell Kiffe, senior managing director at CBRE Capital Markets, said, “Last couple of years, our origination volume has been agency loans, but, this year, it’s been flip flopped. This year, we’ve done more student housing deals with life companies than any other source.”
“We see life companies typically being lower leverage, very picky on location, sponsors and universities,” Kiffe added. “But if you get a deal they really like ... they can be very competitive.”
Todd Goulet, senior vice president and regional production manager for KeyBank Real Estate Capital, further summed up the idiosyncrasies of some of the capital players in the student housing market by saying, “If the life companies want a low leverage deal, they can win on pricing. CMBS-the conduits can win on leverage and terms. The GSEs [government-sponsored enterprises] will be competitive on full leverage deals.”
Despite this improved ability to attract new and varied capital sources, student housing experts still maintain that unfair bias is baked in compared with traditional multifamily financing. On a typical deal, student housing experts assert that they generally have to bring more equity to the table for lower leverage, although they contend that how much more varies depending on the asset, location, sponsor and anchor school.
Some lenders also place a premium of anywhere between 30 and 50 basis points on construction loans for student housing. And some major sources of capital for multifamily still remain closed for student housing. “FHA [Federal Housing Administration] still doesn’t do purpose-built student housing,” said Tom Booher, executive vice president of PNC Real Estate, during the pre-conference discussion. “They will finance regular multifamily that has a student contingent, but they haven’t wrapped their arms around purpose-built.”
Vince Toye, managing director and GSE head of production for Wells Fargo Multifamily Capital, added, “Both Fannie and Freddie have specialty products-student, senior, manufactured housing. ... But a lot of capital sources don’t have the expertise and don’t want to get into those specialty markets.”
However, the GSEs will likely have to back off some of their investments in the sector as their regulator pushes to reduce overall lending. During the lender panel, Rich Martinez, vice president of production and sales at Freddie Mac, said, “We were lucky enough to catch the beginning of it [student housing wave] and ride it up. ... [but] we will do 10 percent less this year [than in 2012].”
As capital providers fastidiously select their investments in the sector based on particular parameters, pricing and valuations also are affected. Student housing experts say that a student housing transaction typically has a higher cap rate than comparable multifamily trades by roughly 100 basis points.
Add in rising concerns about oversupply in the student housing market and those discounts are also spilling over into stock valuations for publicly held student housing REITs. American Campus Communities (ACC) President and CEO Bill Bayless was particularly vocal about this issue during the conference kick-off panel. “ACC, this year, is really an example of whether you want to be in student housing,” he said. “We are on pace to deliver nine to 12 percent shareholder returns. But this is the first time we didn’t meet [Wall] Street expectations. And the results were punitive.”