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University Housing Bankruptcies Show Rare Misfires in Hot Market

Sept. 1, 2022, 4:33 PM

Luxury college student housing projects, once feared to be in jeopardy of bankruptcy at the onset of the pandemic, have since become a magnet for real estate investors.

College students with money to burn have more cushy living options than ever as real estate developers continue building and improving on luxury-style facilities near the nation’s largest universities. As a result, the fears of distress in the sector that bubbled up during earlier parts of the Covid-19 pandemic have largely proven unwarranted.

“During Covid there was a big question about student housing as an asset class,” said Mitch Rosen, head of real estate at alternative investment firm Yieldstreet. “That has reversed.”

The student housing sector experienced near-record deal levels in 2021, topping out above $10 billion in investment sales, according to commercial real estate firm CBRE. The total is more than twice the volume seen in 2020, it said.

The industry has been encouraged by recent on-campus student enrollment rates and a growing preference for apartments with posh amenities. Institutional investors have maintained an interest in properties on or near large universities known for their football teams and other sports programs.

Optimism in the market was punctuated in April as Blackstone Inc. announced a $12.8 billion acquisition of student housing operator American Campus Communities.

Some projects have run into financial problems, including buildings backed by municipal bonds. The occasional missteps have allowed other well-capitalized firms to scoop up desirable properties at a discount.

“If you’re not building a property at a viable college, you’re going to have a real problem,” said Jonathan Litt, founder of activist real estate hedge fund Land & Buildings Investment Management LLC.

Reversal of Fortunes

Concerns about the profitability of college housing investments spiked in March 2020 as schools shut down in-person classes and sent many students home. Investors’ expectations quickly turned grim, and American Campus’ stock price dropped by more than 50% in the weeks that followed.

But the most dire predictions never came to pass even as undergraduate student enrollment rates declined by 3.6% in the 2020 fall semester compared to 2019. Only a few projects hit the skids in the wake of the pandemic, with most citing pre-existing problems that were exacerbated by the campus shutdowns.

Buoyed by federal stimulus and steady occupancy in the first full school year after Covid lockdowns, university housing investments ballooned in 2021 as students returned to more normal campus life.

In Boston, there was a notable drop in enrollment for the fall 2020 school year, but in 2021 “that number has rebounded,” said Tim Davis, the city’s deputy director of policy, development and research. The city is now in the process of trying to add 18,500 beds by 2030, he said.

The National Student Clearinghouse Research Center reported in May that the number of enrolled undergraduate students in the US had declined by 1.4 million, or 9.4%, post-pandemic.

But enrollment in post-secondary schools will increase annually by 1.1% on average from 2020 to 2031, according to estimates by National Multifamily Housing Council. “Based on that growth, the student housing market will grow from a total of 8.5 million beds in 2020 to 9.2 million by 2031.”

Optimistic about the outlook, investors like Blackstone and Brookfield Asset Management Inc. have recently poured billions into the space.

Distressed Properties

But a handful of off-campus developments were forced to seek legal cover following the pandemic.

Midtown Campus Properties LLC, the developer of a 310-unit luxury complex at the University of Florida that sold $78 million in unrated taxable municipal bonds in 2019, filed for bankruptcy just two months into the pandemic as construction was still underway. It said existing labor and weather problems disrupted the project’s completion.

San Clemente, Calif.-based developer Nelson Partners put three of its luxury student housing projects into bankruptcy last year, citing revenue loss caused by the pandemic. But the firm had also been plagued by financial and legal issues, including litigation brought by lenders.

In June, Nelson Partners put its Auraria Student Lofts building into Chapter 11 less than an hour before lender Fortress Investment Group LLC was set to foreclose on the downtown Denver high-rise, it stated in court papers.

“Like any type of real estate, you can really get yourself upside down if you have too much debt,” Litt said.

Rare Opportunity

Successful off-campus student housing largely depends on location, said Mike Hung, senior vice president of acquisitions for CA Student Living, part of real estate firm CA Ventures.

Flagship universities in high growth states, especially across the Sunbelt, are increasingly attracting more students. Within those markets, many of the best performing properties are typically within a half mile of campus and offer access to amenities, Hung said.

Smaller developers who don’t understand college leasing cycles or locational preferences could experience some difficulty. But “if you’re in a good market, you can usually right those wrongs within the first year or two of delivery,” he said.

Late last year, CA Student Living acquired Midtown Campus’ building in Gainesville, Fla. out of bankruptcy for $104 million, marking the unit’s largest single asset acquisition.

“I don’t think you’ll see a trend of that happening,” Hung told Bloomberg Law. “I’d love to find more deals like that but you’re just not seeing it at these Power Five school locations.”

Lessons Learned

While Covid has created some uncertainty in student housing broadly, lenders aren’t shying away from attractive locations where enrollment numbers are increasing, said Morrison & Foerster LLP restructuring attorney Seth Kleinman.

Still, he said, Covid was “a real wakeup call that there could be structural changes in student housing,” he said.

Park West, a student housing complex near Texas A&M University, recently defaulted on a July 1 debt payment. The luxury off-campus building with a resort-style rooftop pool has maintained average occupancy above 90% since before the pandemic and has remained nearly full since last year, according to Moody’s Investor Service.

But the project is in a “relatively isolated location,” making it harder to raise rents to compete with “equally attractive housing” concentrated closer to restaurants and entertainment, Moody’s said.

Park West’s decline appears to be a one-off situation and isn’t indicative of endemic problems, said Rosen.

“In certain markets, you’ve seen too much supply that has certainly kept a lid on rent growth or rent in general,” he said. “Each university has its own set of metrics that apply.”

To contact the reporter on this story: Alex Wolf in New York at awolf@bloomberglaw.com

To contact the editors responsible for this story: Maria Chutchian at mchutchian@bloombergindustry.com; Roger Yu at ryu@bloomberglaw.com