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Law360 (September 8, 2020, 6:02 PM EDT) --
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| Mitchell Poole |
Overview of the Off-Campus Student Housing Market
By the 1990s, off-campus housing for students began transforming from a highly fractured supply of vintage boarding houses, single family and duplex homes, and apartment complexes — often locally owned — into a market with over a million beds in newly constructed, student-specific, campus-adjacent housing facilities.
Compared to traditional multifamily product, the modern student housing is now dominated by a relatively small number of national firms.[1] The explosion from a niche market into a significant and still growing submarket of multifamily housing was dramatic and understandable.
David Adelman, CEO of Campus Apartments Inc., recognized in the mid-1990s that existing student housing was largely outdated and or poorly managed and that just as professional food service providers were already taking over and "more effectively and efficiently managing campus cafeterias, a similar concept could be applied student housing."[2]
Combine that epiphany with university enrollment in Title IV schools increasing from 13.5 million students in 1989 to nearly 20 million in 2019,[3] and the new purpose-built student housing submarket was ripe for geometric growth. By 2018 the 175 largest U.S. universities needed nearly 80% of their students to reside off-campus,[4] and by 2019 over 8.5 million of those 20 million students were living in rented space off-campus, with approximately 17% of those 8.5 million living in purpose-built student housing in close proximity to campus.[5]
The future of purpose-built student housing was still very bright at the start of 2020, as reflected by gradually lowering cap rates over the prior six years[6] and overall occupancy rates holding steady at about 95%.[7]
New Product Development Delays
One thing that makes development of new student housing materially different from traditional multifamily housing is the timing of it. Unlike traditional multifamily housing, preleasing for student housing occurs many months in advance of the start of the academic year, and once the academic year commences, there is relatively little turnover or backfilling of beds. Most student housing projects start preleasing no later than March and are largely preleased for the upcoming academic year by July 1.
Student housing developers, therefore, typically try to time construction completion for July to early August so as to shorten the initial lease-up and stabilization period and thereby reduce carrying costs. Colorful brochures and websites for soon-to-be-completed housing that students witness being built near campus help generate preleasing demand prior to the issuance of a certificate of occupancy.
If, however, a developer knows in the spring that completion of its student housing project will be delayed until well after the school year commences, there are obvious legal risks for failing to discuss such conditions, and once disclosure occurs students will rent beds elsewhere.
A delayed project, therefore, likely means low occupancy for that entire academic year and harm to a project's expected return. Such risk drives specific construction loan and joint venture agreement covenants, defaults and reserve conditions.
With a focus on construction completion dates, start dates for new student housing is, therefore, often determined by working backward. A Gantt chart will show the optimal range of dates for land acquisition and groundbreaking. If the start date for a project gets delayed too long, some developers would rather mothball the project until the next ideal start window rather than deliver a completed project a couple months in a school year.
Fortunately, COVID-19's impact, so far, on the timing of construction commencement and completion for new student housing appears to be modest.[8] When governmental orders closed businesses in the spring and summer, multifamily housing construction was often included as an essential business and exempt from closure orders, but not always.
Mark Stinger, managing director of residential investments for Diamond Realty Investments Inc., noted that in the case of New York, affordable housing projects were declared essential projects and student housing projects were not.[9] If a student housing project was nearing completion for the 2020-2021 school year and its construction was halted in the spring and or summer, preleased units were now in jeopardy of not being delivered and the owner's ability to prelease was undermined.
However, with some schools pushing start dates back to as late as October, a developer suffering a month or two construction delay because of COVID-19 or otherwise might have gotten lucky and suddenly found itself with a chance to fully prelease and open in advance of the school year.
Because most new student housing projects take a minimum of 15 months to complete and can take greater than two years to complete for high-rise projects, projects slated to be completed in summer 2021 are particularly vulnerable to any on-again, off-again COVID-19 construction closure mandates going forward, especially if the contingency period baked into the construction schedule has been used up by past COVID-19 closures or other delays (e.g., Hurricane Laura).
Until COVID-19 is under control, developers of ongoing student housing construction projects will track with care any new ordered construction shutdowns related to COVID-19 as well as milestone dates clauses and reserve balance provisions under their construction loan agreements and joint venture agreements.
Lease-Up Demand
Since March, local and national news stories have reflected daily upon the economic hardships faced by tens of millions of Americans and how universities struggle with decisions such as whether to have in-person or remote-only classes or whether to even open campuses or remain open. Further, many state, county and city orders have established rules or guidelines specific to the operation of businesses, including colleges and multifamily housing.
Such standards in any location often do not remain static. New COVID-19 data regarding transmissibility and actual transmissions is updated frequently and so are corresponding governmental orders reacting to same. Off-campus student housing owners and operators must constantly check to see what rule or guideline changes, if any, affect their operations.
Regardless of whether government orders applicable to campuses exist, universities are restricting on-campus housing occupancy. Traditional on-campus housing does not offer the privacy and social distancing commonly offered through modern purpose-built off-campus student housing such as single occupancy rooms and 1:1 bed to bath ratios.
Double and greater occupancy rates and high bed to bath ratios common to on-campus housing is the primary driver for why schools are limiting, voluntarily or otherwise, on-campus housing occupancy for the 2020-2021 school year.[10]
Given so much uncertainty regarding when or how a university will reopen or stay open with in-person classes, the high cost of higher education, and the new limited availability of on-campus housing, a presumptive conclusion would be that the value proposition for attending college in 2020-2021 has diminished dramatically and that many college students or their parents would support skipping a semester or year.
Compared to business and leisure travel expenditure reductions of 45% to 50% for 2020,[11] demand for college enrollment and off-campus student housing remains comparatively strong. Fitch Ratings Ltd. predicted on June 8 that the college enrollment for the fall would be lower by about 5% to 20%.[12]
Fitch's numbers appear to be borne out in the market with current owners and operators of student housing referencing only about a 5% to 15% reduction in occupancy for this fall, except at those schools at the lower end of the perceived value proposition range and or where a greater percentage of students come from families with a materially greater likelihood of suffering catastrophic income loss from COVID-19.[13]
The relative strength of demand for off-campus student housing is evidenced in part by owners generally not having to include early termination rights in their leases in the event the school closes early or goes to on-line classes only, although there has been some extra rent concessions offered for 2020-2021.[14]
Why does a relatively strong demand for college and student housing exist during a pandemic? Perhaps both students and their parents intuitively realize that attendance at college, no matter how materially modified the experience might be because of COVID-19, can be a practical or even necessary benefit for Generation Z, if not the parents as well.
Cigna Corp. found in a national survey of 20,000 adults this summer that Gen Z is the most lonely generation in America as measured on a clinical scale and concluded that "one of the most important things parents can do is to encourage teens to hang out with friends and have regular, meaningful social interactions."[15] The foregoing also may explain why, despite early college closures in the spring caused by COVID-19, so many students remained in their off-campus student housing rather than head home.[16]
Other factors that have driven demand for off-campus student housing for the 2020-2021 academic year include: (1) COVID-19 induced reductions in on-campus housing options, and (2) modern student housing's predisposition toward single occupancy bedrooms with 1:1 bed/bath ratios. Such features provide parents and students with additional comfort that students can socially distance, limit contact and isolate or quarantine when desired or needed.[17]
The Next 10 Months
If COVID-19 gets materially worse on campuses during the 2020-2021 school year as many expect it will and or if COVID-19 gets materially worse generally such that the economy is inherently undermined further, students might not go home even if schools close and or the ability to pay rent is lost. Students might simply try to stay put without making rent payments. Such threat to student housing owners gets enhanced if governments create or extend eviction moratoriums for residential leases — assuming student housing is included under residential leases.
Eviction moratoriums, however, generally do not bar evictions for material noneconomic defaults. However, evicting students for failure to comply with COVID-19 protocol, rules and regulations inserted into the leases might prove difficult if an operator does not enforce such rules with both diligence and consistency.
Diligent and consistent enforcement protects all occupants' health and undermines discrimination, waiver, and course of conduct defenses to eviction. At least one student housing owner and operator believes that students' fear of being evicted, with a potential consequence of being forced back to their parents' homes, encourages students' COVID-19 protocol compliance, at least at the student housing site.[18]
Nonetheless, evicting students for monetary or nonmonetary lease defaults during a school year will assuredly lower occupancy in 2020-2021 because backfilling beds for the remainder of the academic year is highly unlikely.
All businesses are hoping for effective vaccines or therapeutics to tame COVID-19 before summer 2021. If that occurs, the timing could not be better for the student housing market preleasing ritual, and the strong underlying market fundamentals for student housing will likely result in a solid 2021-2022 school year.
Mitchell Poole is a member at Cozen O'Connor.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Chuck Ehmann blog posted March 14, 2019 at https://www.realpage.com/analytics/student-housing-owners-concentrate-market-share/.
[2] Interview with David Adelman, August 21, 2020.
[3] https://www.statista.com/statistics/183995/us-college-enrollment-and-projections-in-public-and-private-institutions/.
[4] CBRE Research Report: United States Student Housing 2019, citing Axiometrics, 2018 (http://cbre.vo.llnwd.net/grgservices/secure/US%20Student%20Housing%202019.pdf?e=1598633002&h=d6ef5bc1df6fb9c0e6f02656ef66819d).
[5] Paige Mueller and Jeffrey Havsy, Eigen 10 Advisors, LLC, The U.S. Student Housing Market: On-Campus, Student Housing and Student-Competitive Properties, p. 16, published by NMHC Research Foundation January 2020 (https://yourtcp.com/Student%20Housing%20White%20Paper.pdf).
[6] https://yourtcp.com/Student%20Housing%20Newsletter.pdf.
[7] CBRE Research Report: United States Student Housing 2019, citing Axiometrics, 2018 (http://cbre.vo.llnwd.net/grgservices/secure/US%20Student%20Housing%202019.pdf?e=1598633002&h=d6ef5bc1df6fb9c0e6f02656ef66819d).
[8] Interviews with David Adelman, August 21, 2020, and Diamond Realty Investment, Inc. executives, August 24, 2020.
[9] Interview with Mark Stinger, August 24, 2020.
[10] Interview with David Adelman, August 21, 2020.
[11] Terence Baker blog posted August 18, 2020 at https://www.hotelnewsnow.com/Articles/304001/Demand-fundamentals-stimulus-cash-key-to-US-recovery, citing Tourism Economics President Adam Sacks.
[12] https://www.fitchratings.com/research/us-public-finance/declining-enrollment-revenue-risk-more-acute-for-private-colleges-08-06-2020.
[13] Interviews with David Adelman, August 21, 2020, and Diamond Realty Investment, Inc. executives, August 24, 2020.
[14] Interviews with David Adelman, August 21, 2020, and Diamond Realty Investment, Inc. executives, August 24, 2020.
[15] Jena Hilliard, America's Loneliness Epidemic, Addiction Center, June 18, 2020 (https://www.addictioncenter.com/news/2019/08/gen-z-loneliest-generation/).
[16] Interviews with David Adelman, August 21, 2020, and Diamond Realty Investment, Inc. executives, August 24, 2020.
[17] Id.
[18] Interview with David Adelman, August 21, 2020.
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