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CRE Finance World Summer 2015
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s students continue to arrive on college campuses across
the country every fall, developers have continued building
apartment complexes to keep up with demand for student
housing, resulting in a large spike in off-campus construction
in the last several years. According to a March 2015 article
in the National Real Estate Investor, developers added approximately
60,000 and 63,000 beds to the student housing inventory in 2013
and 2014, respectively. While construction ahead of the 2015-2016
school year is expected to be lower at just 48,000, this still exceeds
inventory growth for this property type at the peak of the market in
2008. The CMBS industry has also seen an uptick in the number
of student housing properties being securitized in transactions.
Based on a study of loan data conducted by DBRS, the increase
of these securitizations seems to mimic the frequency of watchlist,
delinquency and special servicing events associated with student
housing properties across CMBS transactions issued in 2010 and
later. This would lead one to believe that loans secured by student
housing properties are more prone to default than those secured
by traditional multifamily properties.
Exhibit 1
US CMBS: Student Housing (% of total Multifamily Issuance)
As a sub-category of multifamily properties, student housing assets
have been deemed by DBRS to carry a greater probability of default
given their vulnerability to shifts in occupancy and cash flow. All
leases generally start and expire in the same month, depending
on whether nine-month or 12- month leases are required. If an
operator misses during the critical, concentrated leasing period
for college students who need to secure housing ahead of the fall
semester, it becomes challenging to make up the lost ground during
the school year and maintain market rental rates. In comparison,
traditional multifamily properties benefit from a more diverse tenant
profile with lease expiration dates that are spread more evenly
throughout the year. The result is two-fold: greater occupancy
volatility and greater cash flow volatility for student housing
properties compared to non-student housing properties.
The graph below compares the volatility
1
of occupancy and net
cash flow between student housing and non-student housing
properties securitized in CMBS transactions since 2010. The year-
over-year occupancy and net cash flow changes were calculated
using the FYE financials as reported in the investor reporting
package (IRP) for each financial year reported.
Exhibit 2
US CMBS: NCF & Occupancy Volatilities for SH/NonSH
Perhaps the most significant performance factor for any student
housing venture is its proximity to a college campus. This geographic
limitation means that developers have had to find other ways to
market a property’s appeal. Many in the industry have commented
on the growing list of demands student tenants bring to the table.
These include tenant lounges, resort-style pools, game rooms,
fitness centers, tanning beds, campus shuttles and high end finishes
such as granite counter tops, stainless steel appliances and upgraded
flooring. It is not uncommon for property managers to offer leasing
incentives such as gift cards or flat-screen televisions, and many,
if not all, of these amenities are deemed necessary to remain
competitive as new student housing properties are added to the
market. It would follow, then, that replacement costs and operating
expenditures for these properties are higher than those that do not
cater to students.
A
Student Housing Performance in CMBSJorge Lopez
Financial Analyst,
Global CMBS,
Global Structured Finance
DBRS
Roxanna Tangen
Assistant Vice President,
Global CMBS,
Global Structured Finance
DBRS