|
|
Credit: Pixabay
Deep Dive
Is student housing's party over?
Falling enrollments, excess supply and an uptick in defaults may
foretell the end of a years-long spate of building amenity-rich housing
on and off campus.
Joe Bousquin
Nov. 6, 2019
Luxury student housing properties, complete with rooftop swimming pools
and opulent lobbies, have been a hallmark of the current development
cycle.
Indeed, with capital flooding the sector, the post-Great Recession
student housing boom has been held up as the category's coming-of-age
party, when it shed its mom-and-pop image to emerge as a true
institutional asset class. As some evidence of that, student housing
property prices hit an all-time high this summer.
But now, the converging trends of increased supply and declining
enrollment at institutions across the country, paired with rising
defaults on student housing-related commercial mortgage-backed
securities (CMBS), are casting a shadow on the asset class.
Student housing accounts for 40% of defaults in the multifamily sector,
despite representing less than 6% of loans, according to Moody's.
Viewed in light of a particularly acrimonious dispute at the University
of Oklahoma over a public-private partnership (P3) — another hallmark
of this cycle — it raises the question of whether student housing's
party, which has carried on for the better part of 10 years, is now
stumbling toward the exits.
"Following a decade where everybody was anxious to build, build, build
— and not just dorms — this glut of real estate is going to have to be
dealt with going forward," said Jean Close, an accountant and partner
at The Bonadio Group, which performs audits for higher education
institutions. "Is it going to be a problem? Absolutely. And it's a
little frightening."
Converging trends
Enrollments are declining and that trend is expected to continue, with
one forecast anticipating a 15% drop in the college-age student
population between 2025 and 2029. That's at least partly an outcome of
the last recession, as families tend to put off having children during
lean times.
"We're in a dip now, 18 years after (the recession of) 2001, and
another big dip is on its way in 2025, 18 years after the financial
crisis that started in 2007," said Doug Shapiro, executive research
director of the National Student Clearinghouse Research Center, which
tracks enrollment nationally. "So a lot of colleges and universities
are looking at those trends and really starting to worry about where
their new students are going to come from over the next decade."
Observers note that each institution and student housing market will
experience the decline differently, with larger and more selective
universities still faring relatively well. Smaller and regional
colleges, which have been struggling, will likely feel the brunt of the
drop off. Projects in tight housing markets such as Boston should have
continued demand, while those in less-constrained markets, including
the Midwest, could see oversupply.
Bottom of Form
Two types of development factor in: private apartments built by student
housing developers off campus and P3s in which private developers
partner with universities to build student housing, usually on
campus.
The two are related, with the luxury amenities that originated in
off-campus housing pushing universities into their own amenities arms
races on campus. In turn, the luxury, apartment-like campus dorms are
being used to entice the shrinking pool of applicants to attend one
institution over another.
Off-campus deals abound
Investors have been pouring into the private, off-campus housing sector
since 2009. In that time, deal volumes rose from $1 billion or $2
billion annually to nearly $10 billion by 2018, with prices reaching
their highest point ever this summer, according to Jim Costello, senior
vice president at real estate deal tracking firm Real Capital Analytics.
In the last five years, that has translated into developers adding
between 43,000 and 47,000 beds annually, per multifamily software and
data provider RealPage's third-quarter 2019 student housing market
update.
But this year, as occupancies at off-campus, purpose-built student
housing projects stayed flat from 2018 — for about half the schools
RealPage tracks, those are at 92% occupancy or less — the number of
defaults in the space has increased. Nearly 3% of student housing CMBS
loans are in default, compared to just 0.4% for the multifamily sector
in general, said Kevin Fagan, a senior analyst at Moody's.
"We highlighted 17 student housing defaults on loans that had
originated over the last 10 years," Fagan said. "Of those, 12 were at
schools with declining enrollment."
And the other five? "Even if enrollment is going up, you're not
guaranteed to have positive performance at your property," he said. A
growing student body attracts development, which heightens competition
to fill a greater supply of beds, both on and off campus.
A 'moral obligation'?
Against that backdrop, a major P3 at the University of Oklahoma that
was struggling to fill its beds blew up in investors faces' recently,
when, according to Bloomberg, the institution decided not to renew
leases on commercial and parking space at Cross Village, a $250
million, 1,230-bed project developed on its campus by Baton Rouge,
Louisiana-based Provident Resources Group.
P3s have become an increasingly popular development vehicle in higher
ed. They take both financial and operational risk off of universities
while allowing for the development of more luxury beds on campus.
That's a potential selling point for institutions amid a shrinking
applicant pool.
While each deal is unique, the general structure involves a university
leasing its land to a private developer, which trades on the
university's name to raise debt or equity to build, own and operate the
housing. The developer, not the university, is on the hook for the
financing, and it pockets any profits from the operation of the
building before making lease payments back to the university.
"That's where the university has skin in the game," said Gauri Gupta, a
credit analyst at S&P Global Ratings. "If the developer isn't
making a profit, the university is not getting paid on the ground
lease."
At the end of the lease term, typically several decades later, ownership of the building reverts to the institution.
There's a catch, though. Bonds can't be sold by a public entity without
voter approval, so P3s are financed with either debt or equity
investments that the developer raises in the marketplace based on the
fact that they have a deal with the university. That means the
partnerships are based on a "moral obligation," and not a legal one,
from the university to operate in good faith on the agreement. That
issue was cited in the debacle at U of Oklahoma. From that perspective,
the deals contain more reputational than financial risk for
universities.
At Cross Village, where occupancy hadn't topped 35% in the year since
opening, the university was paying Provident roughly $7 million a year
but claimed only to be generating $40,000, the Tulsa World reported.
With more than $900 million in debt on its books already, the
university effectively walked, claiming it wasn't legally obligated to
renew the leases.
Provident CEO Steve Hicks warned of the situation's potential effect on
the broader market. "I will need to think long and hard before
exploring any other P3 project that shares comparable characteristics,"
Hicks wrote in an editorial in The Bond Buyer last month. "My fear is
that this situation will become a template for other creditworthy
public partners that simply change their minds about deals and abandon
their partners when convenient."
Indeed, in the public sector, many large infrastructure contracting
firms have begun to eschew P3s, saying they put too much risk on
contractors, while the Trump administration, which once endorsed P3s,
has cooled toward them.
Still, analysts say the Oklahoma situation is an outlier, and that
colleges will continue to look to the private sector for investment in
student housing.
"Institutions might have to come up with more creative ways to market
them, and the partnerships might need to get stronger so we don't see
Oklahoma-type deals repeat, but I don't think this is going to stop
anytime soon," said S&P's Gupta. She notes that her universe of P3
coverage has added 11 deals in the last year.
Were the wheels to come completely off a P3 deal, and a building funded
by private investors was foreclosed upon on university land, the
outcome could be murky.
"We don't really have a lot of precedent to look at," said Jessica
Wood, senior director and education sector lead at S&P.
"Bondholders would likely have the right to vote on the outcome, and
the institution would most likely have the right of first refusal."
'How do you retool that?'
Even as colleges pack their campuses with amenities and remain a magnet
for private developers to do similarly nearby, Costello expects any
fallout wouldn't occur across the board. "There will be selection
bias," he said, with elite institutions continuing to attract students.
He notes, too, that the use of debt in financing real estate deals
isn't as high now as it was before the 2008 financial crisis. And even
though student housing accounts for 40% of all multifamily defaults,
the dollar amount is a relatively small part of the overall debt
market, he said.
Moody's Fagan agrees, pointing to the structure of today's deals.
"There's no massive issuance of bonds, and then derivatives off of
those bonds, as happened in the last crash," he said.
Of course, few observers anticipated defaults on single-family home
loans leading up to the financial meltdown of 2008. And the history of
past crashes is littered with utterances of, "It's different this time."
That's partly why other observers see a reason for caution. "There is
obviously going to be excess capacity on many campuses," Close said.
"The question becomes, how do you retool that? What do you do with it?"
One answer may be selling excess property or partnering with other
organizations to put additional capacity to use. She points to Colgate
Rochester Crozer Divinity School, in Rochester, New York, which
recently sold its 22-acre campus to a private developer when enrollment
dropped to around 100 students.
Earlier, it partnered with the American Cancer Society to use excess space for temporary housing.
More affiliations between colleges are also expected, Close said.
The trend could go the other way, too, with private developers looking
to be bailed out by the universities they've built their projects near.
"The dream of many developers is that the university will sweep in and
rescue it, and then it'll be the taxpayers' problem to solve," said
Stephen Harrison, vice president for auxiliary enterprises at Coastal
Carolina University, in South Carolina.
"That's not something that campuses are likely to do," he continued,
"although we may be asked if there are other functions for a building
that's essentially adjacent to our campus, such as for offices or
classrooms."
|
|
|
|
