COVID-19 Outbreaks Spell Trouble for Student-Housing Owners

A wave of Covid-19 outbreaks at universities is adding to the challenges facing the student-housing sector.

Source: WSJ | Published on September 8, 2020

online job scams

In August, a number of major universities said they were moving to remote learning after the first days of classes led to a spike of infections in and around campus. That is bad news for the investment firms that buy and rent out student housing in college towns, some analysts say.

The share of nongovernment-backed mortgage bonds secured by student housing that are delinquent rose to a peak of 13.7% on July 1, according to Trepp LLC. That is up from 9.7% at the beginning of March and the highest figure since at least 2005.

The worst fears that faced the sector earlier this year proved to be overblown. Leasing held up relatively well at many universities that are attempting in-person classes. Some landlords may see more demand as on-campus dorms close.

But on balance, the new surge in Covid-19 infections at universities is hurting student housing, according to a recent report by John Pawlowski, a senior analyst at Green Street Advisors. Landlords face greater risk that students either don’t move into student housing or demand refunds, the report said.

Also, the sector was showing the signs of strain even before the pandemic because of overbuilding.

Investors fled the student-housing sector in the spring as the first universities, including the California State University system, said they would teach remotely in the fall. The share price of American Campus Communities Inc., the only major public student-housing-focused real-estate investment firm, fell by more than half between late February and late March.

Since then, shares of American Campus have recovered some of the loss. But they are still down 24% for the year and trail other real-estate investment trusts and the S&P 500 index by a considerable margin, reflecting lingering concerns over student housing.

David Adelman, chief executive of Campus Apartments, which says it owns more than $2 billion in student housing across the country, said his portfolio’s occupancy is in the mid-90% range. Income has dipped slightly at some properties, but increased or stayed flat at others. “Flat is fine as far as I’m concerned,” Mr. Adelman said.

Student housing has seen a surge of investment over the past decade as low returns on traditional real estate led institutions to seek out more obscure sectors of the property market. Investors were drawn to student housing because of a rise in college enrollment and because it was seen as generally more recession-proof.

It fared relatively well during the last recession in part because some people who lost jobs chose to go back to school, investors say.

The health concerns of the current crisis have undercut the recession-proof theory, however, as major universities moved to remote learning because of Covid-19 outbreaks.

The University of North Carolina at Chapel Hill, for example, initially opened its campus to students last month, but backtracked and switched to remote learning for undergraduates after an outbreak in Covid-19 infections that saw 135 cases in a single week. A day after the announcement of UNC’s policy change, Michigan State University, which had around 50,000 students last year, asked undergraduates to stay home and study remotely. It also encouraged students who live off-campus to stay in their home communities.

The steps taken by some colleges are pushing student housing already under pressure to the breaking point. Take a portfolio of five student-housing properties near the University of Connecticut in Mansfield, Conn. Income fell sharply in recent years because of competition from newer buildings, according to watch list commentary on the buildings’ mortgage bonds.

The properties’ owners stopped making loan payments and were more than 90 days behind on their $15 million mortgage as of August, according to Trepp. In a statement, the property’s owner, CT Liberty Group, said it has since reached a consent agreement with its lender. “Virtually overnight, we lost 90 percent of our tenants and the income that came with that” when the university closed its campus in March, the company said.

The University of Connecticut said it reopened its campus at reduced capacity last month and about half of students are taking all their classes online.

Green Street’s Mr. Pawlowski said some lower-tier universities had already been struggling financially and the recession is likely to worsen the problem as enrollment drops. School closures or downsizing could in turn lead to empty student accommodations.

“The long-term outlook is probably weakened at the smaller universities,” he said.