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In this Issue
 Student Housing: A Primer
NMHC Reports on What Students Want
Housing Economists Expect Market Turnaround in ’08
Student Housing: A Primer
By Patrick McGovern
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| Patrick McGovern |
The fact that about 80 million “echo boomers” are turning 18 over the next decade has private investors and financial firms investing in student housing in record numbers, according to Michael Zaransky, author of Profit by Investing in Student Housing: Cash In On Campus Housing Shortage. They have found that student housing complexes are typically at full occupancy regardless of local unemployment or interest rate levels. Students also pay the going rate due to on-campus housing factors.
Borrowers should also keep in mind that student housing is a niche market primarily governed by supply and demand, which is the key attraction to investors. Also key is its positive cash flow despite hefty expenses – real estate taxes, high insurance premiums (reflective of the reputation of student renters) and maintenance.
Because of these many factors, borrowers find Fannie Mae’s Student Pilot Program a viable option due to its competitive leverage and pricing. The program defines student properties as those with 20 percent or more of the units leased to students. However, this can be looked at on a case-by-case basis.
Lenders looking to utilize this program should keep the following factors in mind:
- What is the university’s total enrollment?
- Are freshman required to live on campus and is a meal plan required?
- How much does this cost in comparison to the subject property?
- Is there a shortage of beds on campus?
- Is there a lack of off-campus housing? And if not, what makes the subject property unique?
- How many students currently live off campus?
- Are students able to live on campus during the summer months?
- How far is the subject property from the university?
- In terms of growth, what are the university’s total enrollment plans and are they building more on-campus housing?
- Does the subject property have any affiliation with the university?
The subject property:
Are there 12-month leases and parental guarantees?
What is the lease-up schedule like? A strong student property should be 100% fully leased prior to their beginning lease period.
Is there security provided on site?
How are the subject’s amenities compared to the market?Are rents currently under market? And if so, how is that compared to on-campus housing?
Readaptablility – can it be converted to a market-rate apartment complex? And if so, would those units be absorbed in a timely manner?
Once these above details are understood, we are in a position to apply Fannie Mae’s SCRU (Special Risk Category Underwriting) parameters to the property.
Patrick McGovern is a Director in Arbor's New York, NY office. He can be reached at pmcgovern@arbor.com.
NMHC Reports on What Students Want
Now more than ever, it is essential for property owners and management staff to understand what students look for when choosing student housing. The results of What Do Students Want?-- a report published by the National Multi Housing Council based on focus groups with students at nine universities -- should help apartment firms take action to better serve students’ desires.
Cost, freedom and space are among the primary reasons students choose off-campus housing over dorm life, according to NMHC’s research. A “lively” off-campus housing clubhouse-like “central space” is a major draw. In accordance with this concept, students prefer recreational facilities (such as fitness centers, picnic areas and volleyball courts) that promote social activity and interaction with their peers to academically oriented facilities (such as computer labs).
According to the report, space is a primary concern for students, especially in the kitchen and bedroom. Students' number-one request is for a larger kitchen with more counter and cabinet space. Their second request was for a larger bedroom with ample storage space. Many would give up square footage in the living room if it could be added to the bedroom instead.
Rather than sign a lease with their roommate(s), the majority of respondents said they would prefer to rent "by the bed." To simplify their bills, most students preferred all-inclusive rents. Students asked that properties that offer all-inclusive rents post a “base rent” that would enable them to compare them to competitors that do not.
“If the industry hopes to create a positive impression of rental housing in the minds of these customers, who are by definition tomorrow’s renters, excellent customer service may be more important in this sector than in any other,” said NMHC Senior Vice President Jim Arbury. Students repeatedly said that if they could find a property with the right amenities, affordable rent, and a management staff that treats them honestly and with respect, they would stay for two or three years.”
Source: The National Multi Housing Council
Housing Economists Expect Market Turnaround in ’08
Though there appears to be no let-up to the current housing downswing, economists participating in the National Association of Home Builders Fall Construction Forecast Conference on Oct. 24 said they expect the industry to bottom out and to start turning around in 2008.
Acknowledging that there is definitely downward momentum in the market at this time, with starts, sales, prices and permits off, and problems in the subprime and Alt-A mortgage markets, NAHB Chief Economist David Seiders said that housing should nevertheless begin a modest recovery next year.
Despite the present market contraction, Seiders said that housing should begin to turn around next year for a number of reasons: the overall economy and job growth continue to move ahead at a decent pace, core inflation is under control, the late-summer credit crunch in mortgage markets is showing signs of easing since the Federal Reserve cut short-term interest rates on September 18, and the supply-demand equation will be better balanced as builders begin to whittle down excess inventories.
He also noted that the evolving inflation picture gives the central bank latitude to enact more monetary stimulus to support the economy if conditions warrant. Seiders is predicting that the Fed will cut short-term interest rates by another quarter of a percentage point when members of the Federal Open Market Committee meet on October 31 and will enact a similar rate cut by year-end, bringing the federal funds rate down from the current 4.75 percent to 4.25 percent.
From a regional point of view, Arizona, California, Florida, Nevada and the broader Boston and Washington, D.C. metro areas will be most affected by the negative economic fallout from the subprime mortgage crisis, according to Mark Zandi, chief economist at Moody’s Economy.com. Also affected will be areas along the New Jersey coast, the Carolinas, and parts of the industrial Midwest. Regional economies in these areas, he predicted, will encounter more severe declines in construction and housing prices along with weaker consumer spending and significant job losses in housing-related businesses than other markets across the country.
Places that are experiencing the most significant weakening of economic activity at present include Phoenix, parts of central and southern California, Las Vegas and Reno, Nevada, as well as parts of Florida’s east and west coasts, said Zandi. He expects housing activity in these areas to bottom out in late 2008 “at best.”
Source: The National Assoication of Home Builders
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Arbor is a national, full-service real estate investment firm focused on executing the highest level of expertise in order to provide clients with the most expansive, creative, and flexible range of lending products in the real estate finance industry. At Arbor, employees approach business in a results-oriented, decisive manner, striving to serve its customers quickly and efficiently while offering a boutique of unique product lines that distinguishes the company from traditional lending firms.
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