Chicago, IL -- (ReleaseWire) -- 10/29/2007 -- Within the past five years, student housing has been promoted to a favorite property type and subcategory within the multi-family real estate finance sector. Historically, this entrepreneurially-driven industry was controlled by local/regional players. Now, more national firms are acquiring and aggregating student housing portfolios – especially in major university campuses. This sector promises dynamic growth as many institutions are severely in need of affordable and available student housing within near campuses. Furthermore, this sector is not as closely tied to the current residential market malaise as higher education is in strong demand and limited facilities are available.
The real estate capital markets have taken notice. Mortgage conduits, agencies (e.g. Freddie Mac and Fannie Mae), life companies, banks and other institutional funding sources offer attractive competitive funding options for student housing ventures. In the past, lenders would have numerous restrictions on funding such properties including leverage, required parental guaranties and age/property quality issues. However, many restrictions disappeared as ample capital is available to fund these properties based on the following overall parameters:
• Property types -- dormitory, off-campus and hybrid properties are acceptable. Older properties are financeable, particularly within close proximity to a campus. Otherwise, newer, more attractive properties are more desirable.
• Leverage/loan amounts -- loan amounts of all sizes are considered, particularly with the local banks and funding institutions. Otherwise, major institutional lenders prefer $5 million or more. Leverage of 80% is common. Additional mezzanine financing selectively available for properties with demonstrated upside potential.
• Pricing/amortization – Ten-year permanent loan pricing ranges within the 140 basis points spread over comparable-term treasuries to as much as 200 basis points for older properties. The most common pricing falls within 175-basis-point range. Mezzanine loans above 80% LTV are priced starting from 12%. Thirty-year amortization is offered for newer properties (10 years or less) and interest-only payments are occasionally available for lower leverage loans of 65% or less LTV. Most other loans will feature 25-year schedules.
Observation:
Luxury student housing -- Conventional wisdom dictates that student housing should be affordable and competitively priced as students are on tight budgets. Such facilities are fully-occupied and in short supply. Furthermore, new construction costs are prohibitive as well as premier sites close to campus are difficult to find. In other words, affordable student housing is at best, problematic.
Yet an emerging trend is clearly evident – luxury student housing. Many parents [and students] are demanding higher-quality housing and factoring such costs into the overall tuition equation. Select campuses throughout the country are even sponsoring - and encouraging - developers to create more inventory. As such, luxury student housing is among one of the best new development opportunities available.
According to John Oharenko, an advisory board member of The Real Estate Capital Institute®, "Student housing is truly one of the last attractive development frontiers. Steady performance along with insatiable demand for higher education will continue fueling growth in this property sector."
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