TEXLA Housing Partners, LLC
I believe we all have gotten the memo somewhere around September 2008. It was either from your broker, your banker, or maybe your accountant telling you the booming real estate cycle that you were in for the last 15-plus years had now come to a screeching halt. While I believe most would agree a correction was expected, and warranted, I’m not sure if any of us expected the impact to be so widespread, so quickly.
While the boom is gone, it’s time to catch your breath.
I believe we all have gotten the memo somewhere around September 2008. It was either from your broker, your banker, or maybe your accountant telling you the booming real estate cycle that you were in for the last 15-plus years had now come to a screeching halt. While I believe most would agree a correction was expected, and warranted, I’m not sure if any of us expected the impact to be so widespread, so quickly. The shattering effect set off by the defaults of underlying sub-prime mortgages bundled in CDOs, many of which were insured by credit default swaps, has resulted in the tightening of credit to extremes not seen since the Great Depression. Gone, for now, is the merchant-build model. For REITs and other long-term owner/operators, however, this will provide a much-needed opportunity to catch their breath. For years they worried about additional market-supply brought about by either a university or the competition. During the 2006-2008 timeframes, at the height of the market, a record number of developments and subsequent acquisition opportunities were completed. As for today, there are few sponsors willing and/or able to take the plunge in new developments. Also, many universities working in accustomed to finding solutions in public-private partnerships have been challenged on several fronts including the loss of potential bond insurers and letter of credit providers.
All that said, it is safe to say the supply side has been impaired. However, for those interested in pursuing opportunities on campus there should be some opportunities on the horizon. Rates are back down to levels that make projects feasible. Overall, there are few construction lenders in the market looking for the best sponsor and the best deals. For the few developers in position to move right now, the good news for their underwriting is construction pricing is down significantly making for a window of opportunity for the near term. Some markets have seen as much as 20 to 25 percent construction cost compression.
With limited new supply expected in the near term from the public or private sector, owners should be in position to focus on getting back to focusing on the operations side of the business. Although the short term may bring little to no rent-growth, brighter days are ahead as university enrollments continue to swell in the Southeast, Southwest and Western U.S., where in many of these areas double-digit increases are anticipated in the high school graduate demographic.
For those interested in entering the space, we will certainly see some assets going back to lenders due to either poor performance or debt maturities rolling out of higher-levered basis. However, the volume of defaults should be significantly less than what will be seen in the conventional market. Acquisition/rehab/reposition near-campus opportunities should prove to be an attractive for the near and long-term as well. We’ve all seen the older, well located projects located near a campus where the improvements still contribute too much to justify a scrape/rebuild opportunity. An acquisition/rehab strategy opens allows for an opportunity to take advantage of repositioning older assets within their peer group, and still staying well under the rental rates of newer construction projects.
For the select acquisition opportunities, Agency debt is available from Fannie and Freddie with attractive rates (currently around 6 percent, on 10-year terms), and leverage in the area of approximately 70 percent, with little to no I/O. HUD also has programs with higher leverage and longer amortizations for select deals and markets. All-in rates on HUD deals are currently approximately sub-6 percent, including MIP.
In summary, the student housing market has had it set backs over the last year just as all other areas of real estate. However, those well-capitalized firms with patience and funds to invest should be in position to take advantage of opportunities unlike any that we’ve seen in recent years. The forecast is for slow, steady growth in the sector fueled by bulging enrollments in many areas of the U.S.