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Student Housing

Waiting Game

APARTMENT FINANCE TODAY • May/June 2009

The upcoming 2009-2010 student housing leasing season will reveal whether the sector is as strong as fundamentals indicate.

BY Les SHaver

KEVIN LARAMIER IS THE director of student housing for Birmingham, Mich.-based brokerage firm Hendricks and Partners. You’d think right now —at least comparatively speaking— he’d be pretty happy. As the rest of the commercial real estate sector sinks, his business niche is about to see the crest of the vaunted Gen Y wave reach classrooms, dorms, and keg parties at universities all across the country.

Despite those tailwinds, Laramier has his concerns. With the economic meltdown draining both the pocketbooks of their parents and the coffers of the colleges they’d like to attend, there may be fewer Gen Yers going off to school this fall. “We’re watching pretty closely what will happen with lease-ups in the 2009 and 2010 school year,” Laramier says. “We aren’t sure if we’ve seen the effect of when the world dropped off a cliff in September. While everyone else [in real estate] knows how they’ve been affected, we’re just finding out.”

If the students come knocking, Laramier and his colleagues can breathe a sigh of relief. But if the leasing season struggles, student housing could be in the same boat as the rest of commercial real estate.

Ahead of the Curve

By 2015, more than 20 million Gen Yers are projected to be in college, according to The Chronicle of Higher Education. That’s a 10 percent increase from 2008. “We’ll have a higher pool of potential clients over the next eight years,” says David Adelman, CEO of Philadelphia- based Campus Apartments, a student housing builder and owner with 21,000 beds. “For the next eight years, they will stay pretty flat but at an elevated level.”

These promising numbers, along with the growth of firms such as Campus Apartments, are a big reason why lenders started favoring student housing around 2000. Before then, they regarded the sector more as a mom-andpop- oriented, cyclical business, and had little interest in lending their dollars.

“Student housing became the flavor of the month in the early 2000’s,” says Dan Bernstein, chief information officer of Campus Apartments. “It has become more professionalized. Lenders began to say this was a good class, and a lot of institutions [now] invest in the student housing sector.”

The current economic falloff , however, has given lenders reason for pause. But they still seem to have faith in student properties, despite deal flow slowing to a crawl. “There’s financing out there with Fannie and Freddie,” Bernstein says. “Whether it’s on the permanent side or construction side, lenders like student housing but only with good owners and operators, not people who are looking to buy and flip. It’s a flight back to the fundamentals.”

At press time, Campus was about to close two deals with Fannie Mae. “It has been business as usual with the exception of stricter underwriting and less ability to get waivers,” Bernstein says. There have been a few changes at Fannie: debt service has risen from 1.25 percent to 1.30 percent and the agency is basing rental income assumptions on the past 12 months versus a projection of the year ahead.

Fannie and other lenders do have good reason to invest in the student sector. After all, more than 18.5 million Gen Yers will attend school this fall, according to The Chronicle of Higher Education. And those numbers are expected to rise. President Obama’s budget offers a number of major incentives to increase college enrollment, including making the $2,500 tax credit for college education permanent. “In good times kids go to school, and in bad times kids go back to school,” says Kimberly Barkwell, president of Atlanta-based Ambling Management Co., a student housing builder and manager with 32,364 units. In fact, the past six recessions have all seen an increase in college enrollment, according to Houston-based Community Development Strategies Market Research.

That’s a potential boon for people with housing near these colleges. “With the economy the way it is, we believe more people will go back to school,” says D. Scott Rogerson, president of corporate operations and CFO at Lindsey Management Co, a Fayetteville, Ark.-based owners, manager, and builder. “We’re already in those towns, and we’re looking at other areas with big universities.”

The bigger the school, the more opportunties for development. Brent Little, executive vice president and national development partner at Place Properties, an Atlanta-based student housing builder, manager, and owner with approximately 20,000 beds, sees development uptick at the large state schools, while business at or near mid-size schools of 10,000 students remains steady. And at the smaller, often more suburban and rural institutions, Little says students could be more apt to live at home or explore cheaper housing possibilities, such as manufactured housing and older apartment communities.

Immediate Hurdles

True, the demographics favor the growth for student housing, and college attendance is on the rise. But there are some real concerns beginning to form dark clouds on sunny college quads across the country. For one, schools are struggling: State governments are being forced to make massive cuts, and education budgets aren’t immune from the chopping block.

“Every state has reduced their budget for education,” Laramier says. “Every university is struggling to figure out where they make their cuts. That’s a concern. Will kids be able to pay for college if there are not available student loans out there?” And the colleges’ own coffers aren’t exactly as flush with cash as they were a few years ago. Their endowments have been depleted through a combination of poor investments and a lack of giving, Bernstein adds.

So how will these factors effect current property operations? Only time will tell. “The next three or four months are critical,” says Lee Ryder, a principal with Denver-based student housing firm University Communities. But right now, the firm’s business outlook is solid. “We’re in a position to weather this fine,” Ryder adds.

Adelman of Campus Apartments shares a similar outlook. “We have not seen an uptick in evictions or late payments or anything of that sort,” he says. “We think maybe that’s because there’s still an active student loan [program] out there. The loan program has gotten better now that the administration has created a direct lending environment.” (As part of the 2010 budget, Obama’s plan would eliminate the bankand lender-based guaranteed student loan program, and originate all loans in the government’s direct loan program.)

With those headwinds, many student operators think Laramier’s concerns, while legitimate, won’t come to pass. If they don’t, the student industry may prove that it can, indeed, weather this storm.

“Parents are not making as much money, yet kids are still going to college and paying for high-end housing,” Laramier says. “If we don’t see a drop [due to the economic downturn], you’ll hear us yelling from mountain tops that we’ve been right all along, and this is an industry everyone should look at seriously.”