Fewer students, more beds to fill

Lenders and developers fueled a record amount of new student housing supply in the US, but the drop in student enrollment should be a cause for concern

Student housing has seen a record amount of new supply enter the market each fall for several years now, much of which is considered class A product, according to the Fitch Ratings US Housing Forum 2016 report from June.

There were 48,000 beds delivered last year, 65,000 in 2014, and 60,000 in 2013, all higher than the student housing sector’s previous peak of about 45,000 in 2008.

But there’s a problem. In parallel with this record supply buildup, US student enrollment has been dropping for years.

Numbers from the National Center for Education Statistics (NCES) data show that fall enrollment dropped every year between 2010 (a peak year of 21 million students) and 2014.

And new data from the National Student Research Clearinghouse shows that by the beginning of the most recent school year, beginning in the fall of 2015, that trend has continued: overall post-secondary fall enrollments decreased 1.7 percent from 2014 to 18.9 million students.

If enrollment continues to slow, even relatively new dormitories tied to CMBS 2.0 deals could be in trouble. Brand new properties have been built closer to campuses in some instances, making buildings further away less attractive, according to Fitch.

“Student housing continues to be a concern in the Fitch-rated CMBS 2.0 universe,” the ratings agency stated.

As for older buildings, they are experiencing “performance deterioration” due to “occupancy declines, increased expenses, deferred maintenance, and/or average rent declines.”

“Some of these may be related to poor property management or superior properties entering the submarket or declining student enrollment at the nearby college or university,” analysts wrote.

Such properties could underperform and lead to defaults, which should make owners and lenders tied to such properties, as well as investors in CMBS backed by older product, wary.

Based on data from research firm AXIOMetrics, new student housing supply as a percentage of enrollment is now expected to exceed enrollment growth by 40 basis points in 2017, with housing supply growth representing 2.2 percent as compared to expected 1.8 percent enrollment growth.

The construction build up was likely driven by the general market expectation that student enrollment would keep going up after fall enrollment in US degree-granting post-secondary institutions more than doubled between the years 1970 and 2014 (from 8.6 million to 20.2 million students respectively), according to NCES. But, as mentioned, that has not been the case.

It is understood that despite record levels of new product brought to the market in recent years, the withdrawal of supply that occurred between 2016 and 2015 will continue. That could lessen the pressure on the existing housing stock.

Will Baker, managing director at Walker & Dunlop, told Real Estate Capital that based on the current oversupply in the student housing construction loan market, that “things are going to pullback” and that “there will be significantly fewer deliveries in 2017 than there were in 2016.”

But even if there is a pullback on new student housing this year and next — as Fitch Ratings and others expect there will be — the sector faces underperformance and potential defaults as enrollment wanes.