from Black Swan Blog: Student Housing: The Party Isn’t Over
The news as of late has been dour. GM filed for Chapter 11 bankruptcy protection. Formerly stalwart banks have been nationalized. Retailers are vanishing from the U.S. landscape at an alarming pace. Corporations are failing. Unemployment hit 9.1%. The world is falling around us. Whether the economy rebounds in a “V’ formation or suffers from a prolonged Japanese “L” style recovery, life will continue. People will continue to have children. In a recent study conducted by Sallie May, 92% of parents surveyed expect their children to pursue higher-education.
Nationwide, institutions of higher learning only have capacity to house approximately 25% of the U.S. student population in university supplied housing. 11.2 million students are therefore left to fend on their own and rely on alternative providers of housing. The industry remains highly fragmented. No one provider of student housing holds a dominant market share. The two publicly held providers of off-campus housing, American Campus Communities and Educational Realty Trust are both excellent operators and provide the industry with both leadership and visibility. Industry fundamentals remain strong:
· Enrollment Continues to Increase (echo boomers, millennials, etc)
· Insulated from economic drivers/influences
· University owned housing stock continues to age and is increasingly uncompetitive and undesirable
· The bond market has collapsed, making it difficult if not impossible for universities to fund new construction
· Universities are increasingly relying on private operators to provide ancillary services.
· The construction of new off-campus housing supply has slowed markedly.
Student housing, however, remains an operational business much like hospitality. Only the best operators flourish and survive. The pitfalls in student housing are:
· Concentrated leasing season/lack of lease staggering: The student housing leasing season traditionally begins in the late winter or early spring and continues until the beginning of the academic year. Virtually all leases and move-ins take place over the course of a week in August. Failure to lease the property is generally carried through until the commencement of the new academic year the following August.
· Turn: The vast majority of tenants move-out during a one or two week period in August. A property owner generally has a 10 day window to prepare units for the next wave of demanding, impressionable tenants.
· Lifestyle: Amenities, location, and lifestyle sells student housing. Square footage does not. A lack of amenities or failure to remain competitive with newer properties that feature the latest amenities can be deadly. Students are fickle.
· Competition: Student housing operators compete not only against other intuitional providers of off-campus housing but also: universities, local operators of student housing, traditional multifamily assets, and mom & dad’s housing depending on the market/university.
Solid fundamentals and the availability of Freddie & Fannie as a source of capital has isolated the industry from the collapse of CRE. Cap rate expansion, continued absorption challenges from projects built between 2004 and 2007, and difficulty obtaining non Freddie & Fannie capital, are the three most pressing issues facing the industry. There is, however, a tremendous amount of opportunity in the marketplace for experienced student housing owner/operators.
Student housing is only one of many asset classes for most owners of student housing owners. There are relatively few organizations that specialize solely in student housing. Distress in other asset classes is putting pressure on some owners of student housing. Cash derived from cash-flowing, fully-occupied student housing assets is often being diverted to owner’s troubled office, retail, or hospitality properties. To compound the problem, many of these owners overleveraged their properties with cheap CMBS debt originated between 2003 and 2006. Student housing remains a management intensive business. Once an owner diverts cash flow or begins to focus his efforts on managing the problems at his other property types, the risk of an owner destroying a cash-flowing student housing asset skyrockets. The result? More and more owners are simply handing the keys back to their lenders on beautiful, otherwise sound student housing assets financed with overleveraged non-recourse CMBS debt.
Once the keys to a student housing asset are handed back to the special servicer, the servicer is tasked with modifying the debt, finding a qualified assumptor to assume the debt, and ensuring that the asset never ends up back in special servicing by choosing a skilled operator.
Campus Habitat has gained a reputation for its ability to quickly execute REMIC transactions and reposition distressed assets. A recent case study is their Wyoming asset. Acquired out of receivership, this property is a 120 unit, 481 bed Class A student housing asset located adjacent to the University of Wyoming in Laramie, Wyoming. The prior owner, a public company, defaulted on the loan for the property during its merger with another public company. The property subsequently fell under court-appointed receivership. The special servicer was charged by the loan’s Noteholders with finding a qualified assumptor to assume the loan in less than 30 days.
Campus Habitat was approached with the opportunity to acquire the only purpose-built student housing asset in the University of Wyoming market for a fraction of appraised and replacement value by assuming the existing/written down REMIC mortgage at its original pricing and terms. Campus Habitat completed and closed the transaction in just 11 days. The property was mismanaged and poorly marketed during the prior owner’s ownership, despite featuring 96% occupancy when built. An ineffective leasing program, lack of corporate oversight, and mounting deferred maintenance caused this once thriving property to flounder at 43% occupancy during the 2007/2008 academic year.
The first step towards asset stabilization was a multichannel marketing campaign prior even to closing: websites, email campaigns, viral marketing campaigns, and flyers. On the day of closing Campus Habitat’s best leasing agents were dispatched to Laramie while immediately the deferred maintenance was quickly identified and a capital project plan was established. The property occupancy was raised to 96% within eight weeks without having to resort to rate reductions.
Oliver Swan serves as Campus Habitat’s vice president of acquisitions and is responsible for supervising and coordinating Campus Habitat’s acquisition program throughout the United States. Recognized for his creative deal structuring and deep transactional experience, Campus Habitat’s acquisitions group has gained an industry wide reputation for its ability to rapidly execute on complicated transactions including REMIC loan assumptions. Campus Habitat was founded in 1998 by Maximus Yaney with the mission to acquire, reposition, and manage student apartment communities near major universities nationwide. Campus Habitat creates upscale atmospheres by providing the kind of fresh style and ground-breaking amenities today’s student values most. As of May 2009, Campus Habitat’s portfolio spans 7 states and 8 markets.