Paradise Lost on a University Campus Near You

The nationwide student housing sector has some experts worried.  

A growing number of borrowers have had trouble making payments on CMBS loans for student housing projects.  

Of the 398 loans covering student housing properties tracked by Fitch Ratings, one of the big three credit rating agencies, 36 were labeled “loans of concern.” Totaling $671 million, those 36 loans represent about ten percent of the student housing market.  

Why are borrowers struggling to make their payments? 

According to data from RealPage Inc., it’s not due to a drop in occupancy. At the start of the 2019 school year, occupancy in private student housing properties was averaging well over 90%. That number is near the 93.3% occupancy mark at the beginning of the school year in 2018, and just below the peak number of 95.8% in 2016.  

On top of that, rents grew by 1.6% on average in 2018. 

The issue lies with competition with new properties opening nearby.  

“Property performance can deteriorate pretty quickly. Each property has just one target audience—one or two depending on how many schools they serve,” said Melissa Che, senior director of CMBS for Fitch, in an article for National Real Estate Investor. “All it could take is a new property down the road, a newer property with better amenities.” 

12 loans of the 36 “loans of concern” have entered special servicing. A majority of those 12 loans have had new properties open nearby.  

What does it mean for South Dakota? 

“We haven’t seen many private student housing projects in South Dakota since our universities like Augustana and SDSU house a majority of their students on campus,” said Michael Bender, Principal at Bender Commercial Real Estate Services. “USD recently saw two major privately funded off campus housing projects built, so it’ll be worth keeping an eye on in relation to this national trend.” 

Overall, the industry has strong fundamentals, but if more borrowers struggle to make payments on CMBS loans it could have consequences for future student housing projects.