There has been a lot of buzz about the student housing market this week, in particular at the NMHC 2011 Student Housing Conference & Expo. Throughout the conference, I’ve heard many positive trends about this alive-and-well sector; about 25% of projects are new developments, and distressed assets are being purchased and revitalized. Institutional investors are excited about this multifamily niche, which proved to be resilient during the recession.

So what do investors need to consider about due diligence for student housing properties?

As with other multi-family markets, Fannie Mae and Freddie Mac are still the predominant lender. Fannie and Freddie have very specific requirements for environmental and engineering due diligence, so borrowers needs to make sure they hire a company that is knowledgeable with these scopes of work (and sampling requirements). Also, there is a lot of talk about how Fannie and Freddie tend to shy away from new construction because rents can be artificially inflated due to newness.

Phase 1 Environmental on Student Housing

With a Phase 1 Environmental Site Assessment on existing or proposed student housing sites, a few environmental concerns are particularly important to watch out for. As with other multifamily properties, many lenders and investors rightly have a lower risk tolerance with potential health concerns:

• Hazardous Building Materials – Many building materials are suspect of containing asbestos and lead paint, and not just in older buildings. These substances continue to be manufactured and used in certain products. Asbestos and lead paint are typically screened for visually during the Phase 1 ESA process, but actual sampling is necessary to determine whether you’ve got a problem. If you have suspect materials, sampling should be done prior to any renovations or other destructive activities. Fannie and Freddie also may require sampling if there are any damaged suspect materials in a building, even if no renovation is proposed.

• Indoor Air Quality – Mold, radon gas or vapor intrusion (harmful vapors migrating into a building from contamination) can also pose health risks to building occupants. These are also usually screened for in a Phase 1 ESA, but again sampling or further inspection is required to be sure (except for in obvious mold cases).

Property Condition Report on Student Housing

There are also a few distinctions with Property Condition Reports on student housing, which is an evaluation of the building and all improvements at a property and their short and long term maintenance costs. Everything is looked at on a per bed basis (versus number of units), and a lot of times these properties will include fixtures, furnishings and equipment (FFE). In addition, these properties have many high end amenities in common areas (internet cafes, lazy rivers, movie theatres, etc). This, in conjunction with the type of tenant, often leads to a higher reserve number than you would see in a conventional multi-family property.