Student housing CMBS worries rating agencies

Rising leverage on an increasing number of student housing CMBS is raising red flags about a potential spike in troubled loans.

There are currently about 806 CMBS loans for 963 student housing properties with a balance of $12.5bn, which has risen from around $927m in 2011, according to estimates from research firm Trepp.

Of 51 currently delinquent loans, 16 are in special servicing and 13 are considered severely distressed. As leverage creeps up amid the already vulnerable asset class, some CMBS experts are concerned that it will lead to an increase in the pace of delinquencies.

“As with other property types, leverage on student-housing CMBS loans has risen over the past year,” research firm Morningstar stated in a recent report. “Cash flow typically is more volatile than for conventional apartments, as student tenants are less likely to renew leases year after year. When cash flow falls so low that a loan is unable to cover debt obligations, these properties tend to fail swiftly.”

Student housing is already susceptible to volatile cash flows and oversupply concerns, and outdated housing faces competition from new product; it is also difficult to convert these properties into other uses due to their specifically tailored layout, all of which could impair cash flows and lead to loan distress, CMBS experts said.

Some owners of student housing lease a property and manages rents, while others both lease and manage their properties. The latter properties are riskier, as there have been incidences where the sponsor or the management have mispriced rents in anticipation of the leasing season — only to see market rents drop, they said.

“We do look at [student housing] in terms of having a higher default possibility compared to other multifamily property types,” said Robert Vrchota, managing director CMBS group, Fitch Ratings.

Some of the largest delinquent student housing loans are: Towers Property in University Town center, in Hyattsville, Maryland, with an unpaid principal of $50m, Grand Marc in University Village, Riverside, California with a $42m balance, and Willowbrook West apartments serving Purdue University, in West Lafayette, Indiana, with a balance of $26m, which has now gone into foreclosure.

In Statesboro, Georgia, there are about eight student housing properties backing CMBS with a combined unpaid principal balance of $165.7m, according to a Morningstar report. Statesboro based Georgia Southern University has added 1,600 dorm rooms in the last seven years, in addition to 3,100 privately built beds that were constructed between 2012-13 to cater to its 18,000 undergraduates.

One of the Georgia properties in distress is the Copper Beech Townhomes, which had on- and off-campus supply of about 16,500 beds as of October 2014. Morningstar put the $30m loan backing the property on its watchlist in November. Another is Cove at Southern properties, backed by a $5.7m loan that went into liquidation due to dipping rents and occupancy levels.

A higher cap rate means lower property valuation, Vrchota said, and the capitalization rates used to value student housing properties is 50 to 100 basis points higher than it is for traditional multi-family housing loans.

The “base case loss expectation” for traditional multi-family properties is between 4-5 percent, but it is 5-8 percent for student housing loans, suggesting the greater likelihood of losses and delinquencies as leverage rises, he added.

“Where the leverage points are now, Fitch’s estimated stressed losses are higher for student housing loans versus traditional multi-family properties,” he said.

Due to student housing’s vulnerabilities, however, universities are taking steps to keep cash flow up. Some continue to mandate that its students live on campus — in some cases for longer — and many property managers are securing frontal guarantees on rent repayments. For example, Ohio State University, one of the largest US universities by enrollment (45,000 undergraduates) will soon require its sophomores to live on campus.