Since March 2020, the privatized student housing sector has been pressured by pandemic-related closures of schools and projects and de-densification requirements, bad debt expenses from students who were unable to pay rent, and rising costs associated with inflation and a more demanding labor market. However, although projects struggled financially given their limited revenue streams, many also received external support from their associated universities, as schools passed on pandemic-related stimulus funds to cover lost rent or fulfilled existing support agreements. Over the past year, densification restrictions and extraordinary aid have been phased out, and projects are settling back into higher occupancy rates and normalized operations. However, the looming stress of rising costs remains a risk.

The sector has continued to stabilize as the acute effects of the pandemic, such as closed campuses, de-densification, and missed student rent payments ease. However, the past year has also seen a resetting of elevated financial performance for higher rated projects as temporary support from their related universities is reduced. Although occupancy steadily recovered among projects in lower rating categories in fall 2022, albeit more slowly than in the 'A' and 'BBB' categories, fall 2023 median occupancy has remained stable compared with last year, with minimal further changes anticipated. In the 'B' rating category, median debt service coverage (DSC) has steadily improved, based on our expectations for fiscal 2023. Conversely, while projects in the 'A' and 'BBB' categories saw an elevated median DSC of 1.53x in fiscal 2022, we expect fiscal 2023 coverage will decline to 1.4x as external support wanes.

Table 1

Occupancy: Projects Are Mostly Filled, With Some Exceptions

In the past two years, students have been eager to return to campus and the risks associated with the pandemic have decreased. Although new variants have ensured some sustained risk, the acute impact of the pandemic remains minimal on college campuses and their related housing projects into fall 2023. Final occupancy rates are not yet available for all of the projects we rate; however, current reporting suggests occupancy is high across the sector, with slimmer segments remaining below 90%, or even 80%.

Chart 1

Finances: DSC Returns To Equilibrium

As occupancy recovers, DSC likewise continues to stabilize. For projects in lower rating categories, DSC has steadily climbed over the past few years, although fiscal 2023 expected DSC medians remain below the usual 1.2x covenant rate. Conversely, projects rated in the 'A' and 'BBB' categories have seen a decline in median DSC to our forecast fiscal 2023 level of 1.4x, below the fiscal 2022 DSC median of 1.53x. At this time, most projects have fully processed all pandemic-related variability in their financial performance, including university support via federal funding passed through to cover student bad debt expense, as well as drops in occupancy due to health-related precautions.

There are some exceptions. For example, The Maryland Economic Development Corp. Fayette Square project at the University of Maryland, Baltimore continues to receive direct support up to 1.0x DSC from the university. In this case, where the local housing market and older student demographics provide ongoing pressure that was not relieved by the end of pandemic-related measures, the university and project management are considering the sale and closure of the project, so as not to continue the draw on university resources. We expect those universities that did not substantially support their projects before the pandemic will have limited appetite to continue such support much longer if it remains necessary after the lifting of pandemic restrictions.

Chart 2

Reserves: Steadily Increasing Reserves And Steadily Aging Projects

Of 27 projects with reported reserves aside from debt service reserve funds (DSRFs) in fiscal 2021, 63% reported these reserves increased in fiscal 2022, as projects continued contributing to repair and replacement funds, in line with anticipated long-term maintenance plans. Of those five projects with no reported maintenance reserves, all had some level of DSRF available, although only one was funded equal to maximum annual debt service (MADS).

Two DSRFs were underfunded according to their terms, having been drawn on to pay debt service in the past few years and not yet replenished from operations, given fiscal 2022 DSC below 1.1x. We expect projects, especially those that dipped into reserves to pay debt service or that have seen a slow recovery in financial operations, will need more time and sustained recovered occupancy to replenish these funds over the next few years.

Chart 3

Of 55 facilities across the 47 rated projects, 20% opened within the past five years, and 47% opened within the past 10 years. Four projects are still under construction through 2025. Although the advancing age of many projects could require further accumulation of maintenance reserve funds, older projects do not consistently have materially higher reserves than new projects as of the end of fiscal 2022. The project with the highest recorded reserves is Ridgecrest Student Housing LLC at the University of Alabama, with $39.7 million of reserves in addition to a DSRF funded equal to MADS; followed by the Monroe Community College project with $25 million of reserves in addition to a DSRF funded equal to MADS. Average reserve levels outside of DSRFs are generally low for projects that opened after 2016. However, reported reserves might not fully reflect project preparedness for scheduled maintenance, either because recent expenditures for maintenance drained the reserves as planned, or due to a particular point-in-time low in recorded reserves at the end of the fiscal year.

Chart 4

Rating Distribution And Changes: Many Projects Settle At Below Pre-Pandemic Ratings, Although Some Outlooks Were Revised To Positive

As pandemic pressures fade, weaknesses in demand and financial performance persist for a few projects while others see long-awaited recovery. As of Oct. 31, 2023, 68% of projects rated by S&P Global Ratings have a stable outlook, in line with the number at this time last year. However, although 21% of projects have a negative outlook, we have revised the outlooks on five projects to positive since March 2020. Of the five projects with a positive outlook, all are still rated lower than they were as of March 2020 (two by one notch, two by two notches, and one by five notches). In one case, we revised the outlook to positive after a delayed recovery in occupancy to pre-pandemic levels spurred by administrative delays outside of management's control, while others have seen steady enrollment growth at the related universities contributing to increased demand.

Chart 5

Of the 10 projects with a negative outlook, the ratings on two are unchanged since March 2020, while others have been lowered by two to eight notches. In November 2022, we lowered the rating on Beech International LLC to 'CCC' from 'BB+' following a technical default and persistent extremely low occupancy, among other related issues; in November 2023, we lowered the rating to 'CC' and placed it on CreditWatch with negative implications following the use of debt service reserve funds in June 2023 and continued low occupancy, leading to a very high likelihood of potential acceleration. Other significant downgrades since March 2020 include the Foundation for Indiana University of Pennsylvania Phase II project, which has experienced weak-although-slowly-recovering occupancy amid material enrollment declines at the university; and West Campus Housing LLC, which has seen weak DSC amid the additional uncertainty about continued financial support given a declared financial emergency at the related university. Of the 43 projects rated by S&P Global Ratings, since March 2020, more than half (53%) have retained, or in one case exceeded, the pre-pandemic ratings over the past three and a half years, while the remainder have been downgraded by one to eight notches. Of those downgraded since March 2020, 40% have a negative outlook, while another 40% have a stable outlook.

Chart 6

Although two projects were upgraded since September 2022, five downgrades continued the sector's rating distribution shift downward, with two of those projects seeing consecutive years of downgrades. In the past year, we also withdrew our rating on the debt of three projects. Of the two upgrades, CHF Cook LLC was the first project to be rated higher than it was in March 2020, after we raised the rating to 'B' from 'B-' in July 2023, based on improved occupancy and a continued commitment from the associated university to provide support for debt service payments. National Campus & Community Development Corp.-Orange Coast Properties LLC is rated one notch below our March 2020 rating of 'BBB-', following an upgrade to 'BB+' from 'BB' in October 2022 (we revised the outlook to positive on Oct. 30, 2023).

Table 2

One project successfully opened in fall 2023, while three projects started construction with expected openings in fall 2025. Of those newly rated projects that have opened since fall 2020, five of six report fall 2023 occupancy at or above 95%, with improvements seen since fall 2021. Given current high interest rates, inflationary pressures on construction expenses, and labor shortages, we expect new projects will only proceed if management is certain that student demand will support the development.

Table 3

What We Are Watching

Demand and occupancy

For projects to be successful, they need to generate occupancy of 95% or above. Although students are eager to live on campus and we expect occupancy rates at student housing projects will be maintained or increase, much depends on the demand metrics at the respective institutions.

Rising expenses and inflation

Increased occupancy and a reduction in pandemic-related pressures on students' ability to pay rent have generally led to a stabilization in project revenues. However, inflation and rising expenses could hamper operations in the coming years depending on the projects' ability to rein in expense increases or raise rental rates, with many projects resistant to the latter given both competitive market pressures and a drive to keep student housing as affordable as possible.

The importance of university support

Although 56% of rated projects received some university support to make debt service payments in fiscal years 2020 or 2021, university support has generally lessened since then, given the end of pandemic-related federal funds that could be passed through to housing projects and the overall recovery in occupancy reducing the need for such aid. Far fewer projects are still receiving support into fiscal 2023 due to persisting low occupancy.

Increasing reserves

Following a couple of leaner years during which a few projects drew on non-DSRF reserves to make debt service payments and more lagged targeted funding of these reserves because of reduced financial performance in fiscal years 2020 and 2021, almost two-thirds of projects reported increased reserves in fiscal 2022. As financial operations stabilize and projects age, we expect these reserves will increase and contract in line with scheduled maintenance plans.

Table 4