When the COVID-19 pandemic hit in March and the University of Virginia canceled in-person classes, education student Gracie Chandler returned to her childhood bedroom, where she worked toward a master's degree taking video classes on a laptop. It was less than ideal.

Then Chandler's family's house, a short drive from the university campus in Charlottesville, lost Wi-Fi, and she was forced to shift operations temporarily to the student apartment she had left behind.

"I got more done in those two days than I had the entire three weeks beforehand," Chandler said in an interview. "There's just something about being around, that close to UVA, and being where you would be if you were in school, that does for some odd reason lead to being more productive."

With most U.S. universities planning a mix of in-person and online teaching in the coming school year, owners of student housing properties would love it if everyone thought that way. The sector boomed in the years following the last financial crisis based on the proposition that some college students will pay more to live in more modern and luxurious settings than the traditional dormitories. Amid the pandemic, landlords hope they can still attract residents regardless of what happens on campus.

While landlords have reasons to be confident, they also have a limited ability to enforce signed leases if students abandon the idea of returning to campus, Suzanne Sorkin, a senior vice president at the investment firm Adelante Capital Management LLC, said in an interview.

"Honestly, I think the next three weeks are going to be crucial to see who actually shows up," she said.

From basic to deluxe

As recently as two decades ago, students living at most universities had a choice between no-frills university-owned units on campus and no-frills mom-and-pop owned houses and apartments in the surrounding towns. Then some universities, seeking to cut costs, began outsourcing on-campus housing to companies such as American Campus Communities Inc., just as that company and other developers were grabbing students' attention with newer and more lavish off-campus properties.

Chandler's building near UVA, the Standard, has amenities like a golf simulator, tanning beds and a rooftop pool. An even bigger draw, she said, were more prosaic perks like a comfortable study space and, most critically, the ability to live alone in a newly built unit.

The property's owner, Landmark Properties, owns student housing in two dozen states and is one of several privately held companies competing with American Campus, the largest U.S. student housing owner and the sector's only publicly traded real estate investment trust. Two other REITs, Education Realty Trust and Campus Crest Communities, were taken private in recent years by Greystar Real Estate Partners LLC and Harrison Street Real Estate Capital LLC, respectively.

Student housing construction has boomed in recent years, with developers adding more than 400,000 new beds nationwide since 2010, at a pace of 40,000 to 60,000 per year since 2014, according to National Multifamily Housing Council data. Lending to student housing owners also exploded: There were 169 student housing loans totaling $4.0 billion packaged in CMBS transactions in 2015, up from just 12 loans totaling $229.9 million in 2010, according to Morningstar Credit Ratings.

The wave of supply sapped some landlords' ability to raise rents, especially at properties farther from campuses, Morningstar Senior Vice President Gwen Roush said in an interview. Even before the novel coronavirus affected operations, the delinquency rate for student housing loans in CMBS stood at 3.8% in April, compared to 1.6% for CMBS loans across property sectors, Morningstar said. In May, following widespread campus closures, student housing delinquencies shot up to 9.5%.

Adelante's Sorkin, whose firm owns shares in American Campus Communities, said there were signs before the virus that construction was slowing and the company was preparing to reap the benefits of lighter competition.

"Obviously, COVID has kind of thrown a wrench into all those plans," she said.

Learning to adapt

Off-campus landlords worried about the fall may get a lifeline from university-owned on-campus housing. As part of modified re-opening plans, Roush noted, many schools — including Georgetown and Duke — are reducing the number of students living in university housing in a process known in the industry as "de-densification."

As a result, dorms that once had four-person rooms, with several rooms sharing a bathroom, may only have two students or fewer to a room in an effort to promote social distancing. With on-campus capacity lower, industry observers believe a higher percentage of students will necessarily wind up off campus in privately owned housing.

On Aug. 17, just one week after the start of classes for the fall semester, the University of North Carolina at Chapel Hill announced that it would reverse course from a hybrid model and move all undergraduate instruction online.

Because of the change, "we expect the majority of our current undergraduate residential students to change their residential plans for the fall," university officials said in a statement, adding that they were "working to identify additional effective ways to further achieve de-densification" of dorms and campus facilities, and would allow students to cancel fall 2020 on-campus housing plans with no penalty.

While the conversation in the pandemic's early months focused on closed versus open campuses, "people are starting to see that maybe it's not completely as binary as we thought," Sorkin said.

In a second-quarter earnings call, American Campus CEO Bill Bayless sketched out another circuitous benefit of the pandemic. With unemployment higher and household incomes lower than a year ago, "students and parents experiencing financial hardship are now likely to qualify for more financial aid," which they will then be eligible to spend on housing, he said.

As of its earnings report in late July, Bayless noted, the company's portfolio was 90.1% pre-leased for the coming year, 340 basis points behind where it stood a year earlier. Leasing was similarly high at four properties near schools that will be largely online in the fall, with requests for cancellation pointing to a potential occupancy loss of only 5%, the company said.

American Campus, which typically targets occupancy rates over 97% for its properties, has undertaken a massive effort in recent months to predict which signed tenants may not show up in the fall, with employees making more than 64,000 phone calls to residents with pending leases.

"We do not proactively ask directly, 'Are you going to take possession of the unit?' or 'Are you planning to no-show?'" Bayless said. Instead, he added, representatives try to gauge students' plans indirectly, in conversations ostensibly about roommate matching or move-in logistics.

So far, the conversations suggest that a higher-than-usual percentage of residents either will not show up or will request to be let out of their leases. While the company works to re-lease units where tenants back out, Bayless said, lower demand may hamper those efforts.

If smaller and financially weaker student housing owners face similar leasing challenges as the new school year progresses, they may reach out to loan servicers seeking modifications, Roush said.

"I think the servicers are expecting that to happen," she added.

But students, many of whom signed leases in fall 2019 or early 2020, may well stick with their plans to be near school. Even the prospect of taking a gap year and waiting for a return to normal looks less appealing than before, with the pandemic severely hampering students' ability to travel or find jobs, Morningstar Assistant Vice President Joe Shmigelsky said.

"You're going to have the choice of remaining in your parents' house," he said, "or giving campus a try."