Student housing thrives where scores of students need a place to crash while attending classes—live, in-person, on-campus classes. What should be a solid play for commercial real estate appears headed for hard times.
DBRS Morningstar identifies student housing as "the next falling domino" in the commercial real estate industry. "We foresee student housing properties being inadvertently affected in the near to medium term by the move to online-only classes," the credit ratings business wrote in a new report.
To draw that conclusion, DBRS Morningstar took into account preleasing, the option for students to take a gap year and poll results from College Reaction showing "only 65% of students would return to campus if colleges were to physically reopen for the Fall 2020 semester without a coronavirus vaccine or cure." Major student housing owner American Campus Communities said recently that preleasing for the upcoming fall semester was down 40% from its normal leasing velocity, according to the DBRS Morningstar report.
With the anticipated drop in leasing, DBRS Morningstar predicts volatility in loans issued for student housing. About $1.14 billion in loans for student housing will mature between 2020 and 2021, according to the report, of which roughly $947.8 million are commercial mortgage-backed securities loans. If pandemic conditions persist, refinancing for maturing loans could be tough.
"Replacement refinancing during the ongoing pandemic for upcoming maturing loans could pose challenges, as these properties face stressed cash flows and possible value decline," the report said.
For currently leased student housing units, landlords have been willing to work with tenants on payments but stopped short of letting them out of leases without penalty, according to the report. Some politicians and students, however, have called for landlords to allow students to break their leases pain-free.
The student housing sector had issues before the COVID-19 pandemic began, Trepp noted in a new report. Student housing typically carries more risk because of a high number of short-term leases, high turnover and significant upkeep. The last decade saw a swell in supply that led to overbuilding.
Pricing also has become difficult for student housing during the pandemic. Jake Jarman, COO for Redstone Residential, recently shared his take on pricing and advice for how to handle the turbulence.
Deals for student housing have slowed since the pandemic took over many aspects of daily life, scholastic pursuits included. "If a prospective seller were to expect to achieve a closing in the next 90 days, it would most certainly require a lower price than would have been achieved prior to the escalation of the coronavirus," Fred Pierce, president and CEO of Pierce Education Properties, told GlobeSt.com in mid-April.
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Thomas Phillips
Thomas Phillips is part of the social media team at ALM Media.
