Key Takeaways
- Due to the COVID-19 pandemic, student housing properties are facing unique challenges. We analyze the exposure CMBS has to mortgages secured by student housing properties, as well as our view on the risks facing this segment.
- The current data on pre-leasing indicates a slight decline from the same period last year, but the COVID-19 pandemic is creating headwinds for those properties.
- US CMBS exposure to mortgage loans secured by student housing properties totals $18.2 billion across 1,066 loans, of which 33 loans totaling $662.9 million (3.5%) are currently in special servicing.
- In the near term, uncertainty surrounding the COVID-19 virus and how public policy may change regarding social distancing will likely affect performance for student housing properties. Longer-term considerations include whether distance learning will become a bigger part of higher education.
Student Housing 101
Student housing has always been a niche investment among commercial real estate investors. Besides the need to have the right amount of amenities (parking, appliances, clubhouse, and pools) to appeal to the students' desires, the properties must also justify charging students premium rents per semester to live among other students within a somewhat limited amount of space.
Most student housing properties are rented prior to the start of the school semester, by the operators directly to the students. This allows the operators to manage leasing activities, as well as rental rates. In limited cases, the operator will lease the property to the university, under a 'master lease' structure. This ensures stable revenue to the operator and limits downside risk from a decline in occupancy, but it also removes the opportunity for the operator to optimize rental rates and occupancies.
Typical student housing properties are set up similar to a multi-family property, whereby each apartment unit has a varying number of bedrooms. The units are then rented, usually by the bedroom, to students attending nearby universities. In some cases, the student housing properties are set up similar to a hotel or a hostel property, with a series of beds within a room, including communal bathrooms. Students in these types of properties rent the beds. During the COVID-19 pandemic, we believe the properties that have layouts and operations similar to a hotel and hostel are most at risk of performance decline, due to mandated social distancing and the reduced densification needed to safeguard the students from the virus.
Current Events
Prior to the COVID-19 pandemic, many college students lived in student housing properties as part of the college experience. According to a CBRE research article titled "United States Student Housing 2019" (©2019 CBRE Inc.), occupancy levels for both on-campus and off-campus housing stayed fairly constant, at around 95%, from 2016 through 2019. The same report indicated that investment in this sector has surged, rising to $11 billion in 2018, from just over $2 billion in 2011.
With the COVID-19 pandemic in full swing in March 2020, universities around the U.S. started to cancel on-campus classroom interactions and moved towards online learning. We believe the uncertainty around the reopening of university campuses around the U.S., coupled with fears of contracting the virus, will create significant headwinds for student housing properties. Near-term risks include a spike in coronavirus cases and a drop in the number of international students who may postpone their studies at American universities (i.e., this week, Immigration and Customs Enforcement announced modifications to the Student and Exchange Visitor Program, whereby nonimmigrant students, who are studying under certain student visas, and attend schools operating entirely online, may not take a full online course load and remain in the U.S.); longer-term risks include a systemic shift in students' behaviors to embrace online learning that can result in a decline in demand for space, causing a decline in occupancy at these properties. American Campus Communities Inc. (ACC)--one of the largest owners, managers, and developers of student housing properties in the U.S., with over 166 properties totaling 111,000 beds--reported an occupancy rate of 97% for the quarter ending March 31, 2020. However, they also acknowledged that they anticipate slower leasing for the 2020/2021 academic year due to the COVID-19 pandemic.
As of June 2020, many of the states previously operating under shelter-in-place rules started to reopen. At the same time, many universities have announced their intentions to have on-campus learning with some form of online option for students who choose to learn remotely. To our knowledge, only the University of Southern California and the California State University system, with 23-campuses, has announced that it will deliver the majority of classes online for the fall 2020 semester. We also believe some universities could reduce the population density of their on-campus housing by moving freshman and sophomore students, who are typically required to live on-campus, into off-campus properties. We believe that if they do, it will likely result in an increase in occupancy at student housing properties. Another positive effect for student housing properties from the COVID-19 pandemic is a temporary pause in new developments of student housing properties. According to a January 2020 NMHC research paper titled "The U.S. Student Housing Market: On-Campus, Student Housing and Student Competitive Properties," more than 400,000 student housing beds were added since 2010, accounting for 45% of the new beds since the 1970s.
Nonetheless, the situation remains fragile with many medical experts cautioning that COVID-19 virus cases could spike in the fall season. In fact, many states that were the first to re-open their economies in May have already reported such spikes. Should the trend in new COVID-19 cases continue, universities may be forced to close down the campuses again and revert primarily to online learning for the fall semester. Such a scenario would be devastating to the student housing properties, especially in the near-term. However, the fall 2020 semester's current prognosis doesn't appear that grim yet. In a June 2020 presentation at the National Assoc. of Real Estate Investment Trusts, ACC noted that the pre-leasing status for their portfolio properties is down just 2.3% compared to the same period in 2019. In addition, ACC noted that at properties catering to students attending universities that are planning for on-campus sessions, the pre-leasing rate is down just 0.7% compared to 2019.
Recently, S&P Global Ratings revised its outlook on ACC to negative, reflecting the potential for ACC's operating performance to be under pressure from occupancy declines and increases in rent delinquencies and/or concessions. This continues to highlight the significant uncertainty surrounding this property type.
Statistics
According to May 2020 data from Trepp, U.S. CMBS exposure to mortgage loans secured by student housing properties totals $18.2 billion across 1,066 loans. We further break out these loans between private-label CMBS and agency CMBS (Fannie Mae or Freddie Mac) in table 1. Based on May 2020 performance data, 33 ($662.9 million; 3.5%) of the 1,066 loans are currently in special servicing.
Table 1
| Student Housing Loans | ||
|---|---|---|
| Loan counts | Balance outstanding (mil. $) | |
| Private label | ||
| Non-specially serviced | 253 | 4,618.4 |
| Specially serviced | 24 | 531.2 |
| Agency | ||
| Non-specially serviced | 780 | 12,941.2 |
| Specially serviced | 9 | 131.8 |
With the exception of one transaction, the top 10 CMBS transactions with the highest exposure to mortgages secured by student housing properties are all agency-issued CMBS transactions (see table 2).
Table 2
| Top CMBS Deals Exposed To Mortgages Secured By Student Housing Properties | |||||
|---|---|---|---|---|---|
| Deal name | Deal balance ($) | No. of loans secured by student housing | Balance exposed to student housing ($) | % of deal exposed to student housing (%) | S&P Global rated transaction |
| FREMF 2014-KF03 | 17,541,007 | 1 | 17,541,007 | 100 | No |
| WFCM 2018-AUS | 330,000,000 | 1 | 330,000,000 | 100 | Yes |
| FREMF 2015-KKA | 150,105,633 | 2 | 79,055,619 | 53 | No |
| FREMF 2018-X3SL | 43,094,517 | 8 | 19,726,506 | 46 | No |
| FREMF 2018-X3FX | 416,954,933 | 10 | 161,995,548 | 39 | No |
| FREMF 2016-KF23 | 117,596,691 | 2 | 44,692,271 | 38 | No |
| FN AL1692 | 69,257,334 | 1 | 26,224,073 | 38 | No |
| FREMF 2018-KL03 | 717,796,000 | 1 | 247,796,000 | 35 | No |
| FREMF 2014-KX01 | 115,138,360 | 2 | 31,582,389 | 27 | No |
| FNA 2012-M4 | 185,513,949 | 3 | 50,359,443 | 27 | No |
In our view, student housing properties that generally serve students of large public or private universities will likely recover in performance after the COVID-19 virus is no longer a concern. These universities benefit from various factors, among them having public government funding or a high level of endowments, or a perceived higher caliber of education versus the tuition. However, we believe student housing properties that serve students of smaller, regional colleges are most at risk from the fallout of the pandemic. We have already seen falling enrollment numbers at these colleges and the COVID-19 pandemic will likely exacerbates these trends, which will in turn affect student housing properties that primarily cater to these colleges.
Table 3
| Rated Transactions With More Than 5% Exposure To Loans Secured By Student Housing Properties | ||||||||
|---|---|---|---|---|---|---|---|---|
| Deal name | Loan name | Loan balance ($) | Loan % of pool (%) | Watchlist/specially serviced | City/state of properties | No. of properties securing the loan | Total number of beds | Area universities/colleges |
| WFCM 2018-AUS | ||||||||
| Austin Student Housing Portfolio | 330,000,000 | 100 | -- | Austin, Texas | 6 | 4,653 | University of Texas at Austin | |
| COMM 2013-LC6 | ||||||||
| The Summit at Coates Run | 31,991,776 | 3.8 | Watchlist | Athens, Ohio | 1 | 856 | Ohio University | |
| University Edge | 22,904,471 | 2.7 | Watchlist | Johnson City, Tenn. | 1 | 624 | East Tennessee State University | |
| Campus Pointe and Campus Manor Apartments | 15,863,775 | 1.9 | Specially serviced | Macomb, Ill. | 1 | 631 | Western Illinois University | |
| JPMCC 2013-LC11 | ||||||||
| Chandler Crossings Portfolio | 76,919,432 | 8 | -- | East Lansing, Mich. | 3 | 2,772 | Michigan State University and Lansing Community College | |
| FREMF 2019-K91 | ||||||||
| Riverpark Towers and River's Edge Student Apartments | 55,073,000 | 4 | -- | Athens,Ohio | 1 | 528 | Ohio University | |
| College Station Properties Portfolio | 17,920,000 | 1.3 | -- | Tuscaloosa, Ala. | 1 | 171 | University of Alabama | |
| Seminole Trails | 11,123,000 | 0.8 | -- | Tallahassee, Fla. | 1 | 318 | Florida State University and Tallahassee Community College | |
| Collegiate Suites Of Blacksburg Phase II | 10,152,314 | 0.7 | -- | Blacksburg, Va. | 1 | 248 | Virginia Polytechnic Institute and State University (also known as Virginia Tech) | |
| The Village At West Georgia | 6,090,000 | 0.4 | Watchlist | Carrollton, Ga. | 1 | 136 | University of West Georgia | |
| FREMF 2012-K22 | ||||||||
| Links At Starkville | 22,873,361 | 1.9 | -- | Starkville, Miss. | 1 | 528 | Mississippi State University | |
| The Grove At Columbia | 20,024,504 | 1.6 | Watchlist | Columbia, Mo. | 1 | 632 | University of Missouri | |
| Cliffside Apartments | 17,325,062 | 1.4 | -- | Sunderland, Mass. | 1 | 280 | University of Massachusetts Amherst, Amherst College, and Hampshire College | |
| The Boulders | 15,915,411 | 1.3 | -- | Amherst, Mass. | 1 | 256 | University of Massachusetts Amherst, Amherst College, and Hampshire College | |
| JPMCC 2019-COR5 | ||||||||
| Vie Portfolio | 29,000,000 | 4.2 | Watchlist | Various | 6 | 1,799 | Portfolio of six properties in six states; University of Alabama, Texas State University, Florida Atlantic University, University of Buffalo, Penn State University and Ferris State University | |
| Legends at Kingsville II | 13,558,861 | 1.9 | -- | Kingsville, Texas | 1 | 306 | Texas A&M Kingsville and Coastal Bend Community College | |
| FREMF 2017-K64 | ||||||||
| University Village | 78,105,763 | 5.1 | -- | Columbus, Ohio | 1 | 1,051 | The Ohio State University | |
| Collegiate Suites Of Blacksburg Phase I | 10,404,651 | 0.7 | -- | Blacksburg, Va. | 1 | 276 | Virginia Polytechnic Institute and State University (also known as Virginia Tech) | |
| FREMF 2019-K87 | ||||||||
| Sol | 35,421,887 | 2.7 | -- | Tempe, Ariz. | 1 | 639 | Arizona State University Tempe and Arizona College Mesa | |
| The Chelsea | 20,480,000 | 1.6 | -- | Hattiesburg, Miss. | 1 | 792 | University of Southern Mississippi, and William Carey University | |
| Pine View Village Apartments | 19,035,000 | 1.5 | -- | Flagstaff, Ariz. | 1 | 264 | Northern Arizona University | |
| FREMF 2014-K37 | ||||||||
| Z Islander Apartments | 30,082,711 | 2.4 | Watchlist | Bryan, Texas | 1 | 864 | Texas A&M and Blinn College | |
| Poplar Place | 12,613,893 | 1 | -- | Carrboro, N.C. | 1 | 230 | University of North Carolina Chapel Hill | |
| Highland Terrace Apartments | 9,077,584 | 0.7 | -- | Knoxville, Tenn. | 1 | 282 | University of Tennessee Knoxville, Knoxville College and Pellissippi State Community College | |
| College Towne East Apartments | 8,128,304 | 0.6 | -- | Lansing, Mich. | 1 | 138 | Michigan State University and Lansing Community College | |
| The Mill At Blacksburg | 5,750,000 | 0.5 | -- | Blacksburg, Va. | 1 | 160 | Virginia Polytechnic Institute and State University (also known as Virginia Tech) | |
Pencils Down
Although CMBS mortgages backed by student housing properties have historically made up only a small portion of the overall CMBS mortgages backed by multi-family properties, at around 4.5%, delinquency for student housing-backed mortgages has increased at a faster pace than mortgages backed by multi-family properties. This trend will likely continue. Based on our examination of Trepp data on student housing-backed mortgages that have since exited their trusts, over 817 loans totaling $12.5 billion have previously been securitized in the CMBS universe. Of these 817 loans, 748 of them ($11.6 billion) have paid off in full, while 69 loans totaling $876.9 million resolved with losses averaging 37.6% of origination balance. That said, history will likely not provide much clarity on the future given the uniqueness of the COVID-19 pandemic's impact on the performance of student housing, the likes of which, has never been observed historically.
Although the fall 2020 semester is just a couple of months away, it seems like an eternity because of the uncertainty surrounding the COVID-19 virus and how public policy may change. Any change in the public policy will likely impact how university systems approach reopening their campuses. We will continue to monitor the developments of the student housing market and its performance as the COVID-19 virus continues to cast a dark cloud over the sector.
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions, but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
The authors would like to thank Winnie Cai for her research contribution.
This report does not constitute a rating action.
| Primary Credit Analysts: | Dennis Q Sim, New York (1) 212-438-3574; dennis.sim@spglobal.com |
| Gregory Ramkhelawan, CFA, New York (1) 212-438-3041; gregory.ramkhelawan@spglobal.com | |
| Secondary Contact: | Senay Dawit, New York + 1 (212) 438 0132; senay.dawit@spglobal.com |
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