Starting in early 2000, as part of an effort to keep up with the commercial mortgage-backed securities (CMBS), Fannie Mae dropped its DSC to (debt service coverage) to 1.20x and underwrote student housing loans to the exact same parameters as conventional loans.
It’s no surprise that since then, student housing has continued to be a profitable venture for many financial real estate investors. But 2017 is promising to bring an even larger wave to the marketplace, here’s why:
In early 2010, giants like Starwood Capital were noted for closing major deals and expanding their presence in student housing properties. And since then new investors have continued to pile into the market for student housing properties—driving property prices and the volume of deals up and driving capitalization rates down. The new student housing buyers include private equity funds and institutional investors, which are becoming much more likely to bid for student housing properties.
According to Dorothy Jackman, managing director of student housing for real estate services firm Colliers International: “New investors have been drawn to the sector as it becomes more understood. Student housing is much more accepted as an asset class.”
Investors are also impressed with how student housing performed through the Great Recession. Prices for apartment properties overall fell by about 20 percent, but average prices per bed for student housing properties stayed strong, demonstrating resilience and demand.
As we end the first quarter of 2017, the student housing industry as a whole is experiencing an even higher demand. Prices for student housing properties are now similar to the prices investors pay for conventional apartment properties, relative to income. The spread between conventional multifamily cap rates and student housing cap rates has shrunk from 50 to 100 basis points four years ago to just 25 to 50 basis points.
Financing is also more available for student housing properties, at more attractive terms. For example, Fannie Mae and Freddie Mac no longer add an interest rate premium to most loans for student housing properties. Other lenders have also become more accommodating as student housing becomes a more mainstream asset class.
Many large universities have struggled with financing, giving a great opportunity for developers who can build student housing quickly, though so far demand has kept up with supply, as enrollment continues to grow for tier-one schools.
“Enrollment in universities is at an all-time high, further driving this trend forward, but borrower credit has become increasingly important in underwriting student housing loans,” said Mitch Ginsberg, CommLoan’s Chief Executive Officer. “ Around the country, student population is growing. Both graduate and undergraduate programs are experiencing some of the highest enrollment rates and all the students need to live somewhere.”
CommLoan has seen an uptake in student housing requests, with current totals approaching $150 million in student housing financing requests from around the country.
“2017 will be a good year for student housing, demand is increasing, developers are seeing the opportunity and focusing in on it. It’s a great emerging segment,” added Ginsberg.
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