BlackSwan Zine

By Oliver Swan

The credit markets remain frozen. Real Estate Econometrics (REE) estimates that 2.88% of CRE loans were in default in the Q2 09, up 63bps from the first quarter. REE further estimates that the CRE default rate will exceed 5% in 2010 and expects maturities to peak at $1.6 billion in 2012.

Does the data portend a deepening of the CRE crisis? Although it would be foolhardy to opine on the depth or duration of the CRE crisis, where some see a crisis others see an opportunity.

Although it is difficult to bifurcate the default rate of student housing from the overall CRE market default rate, the consensus holds that the default rate of student housing loans remains exceptionally low. Demand for student housing and thus occupancy remains strong. In a rare exception to the general market, rental rate growth remains strong across the country. Furthermore, due to weakness in the general economy, some operators are able to effectuate expense reduction through renegotiated long-term expense contracts and lower labor costs. The result? Higher NOI.

The availability of Freddie & Fannie financing has a profound impact on student housing. Both are actively lending. As importantly, balance sheet lenders feel comfortable lending knowing that Freddie & Fannie remain an option on take-out/exit.

Sellers, unless desperate or facing near-term loan maturity, are not selling for the most part. Due to the fragmented nature of the industry, most owners of student housing also hold other asset-types. The pressure caused by troubled retail, office, hospitality, industrial, and other property types (and looming loan maturities) is forcing some owners of student housing to seek liquidity through the sale of their student housing assets. As the CRE crisis continues to deepen, one can expect vitality in the student housing market to increase. The combination of favorable asset pricing, the availability of new acquisition financing, and strong industry fundamentals (including unheard of NOI growth), should allow student housing to shine through the growing storm clouds.