Off-campus, private student housing and independent/assisted living centers for seniors were already limited asset types within Freddie Mac’s “K-Deal” securitizations, due to their relatively higher risk for investors compared to other standard multifamily property types.
But since the coronavirus outbreak, says Kroll Bond Rating Agency, the assets have been completely scrubbed from the recent offerings from the GSE's singature credit-risk transfer securities vehicle for multfamily housing loans.
“For universities with remote learning for fall 2020, many students living on or near campus have not returned, and some colleges that attempted classroom instruction have asked students to return to their primary residence due to expanding on-campus clusters of COVID-19,” according to Kroll in a recent report. “Residents of [assisted-living/independent-living] properties are particularly vulnerable to COVID-19, and prospective tenants may choose not to move into one of these facilities during the pandemic.
“As a result of these factors, student and AL/IL assets appear to have been mostly scrubbed from the four post-coronavirus K-Deals” rated by Kroll, according to the agency.
Before the coronavirus pandemic induced a broad slowdown in the economy, these multifamily subtypes were already struggling in CMBS portfolios.
Student housing, which makes up only four percent of the total $680 billion in Fannie Mae, Freddie Mac and CMBS multifamily portfolios, had accounted for some 10 percent of total forbearance requests, according to a September Trepp analysis from researcher Catherine Liu.
Assisted living and independent living were exposed to instability early on, and their vulnerability continues, according to Kroll.
If the conjoined impacts of the pandemic and COVID-19 induced economic shortfalls extends past 12 months, say industry executives, delinquencies and defaults could pick up in the portfolios.
“If the pandemic and the impacts to the economy go beyond the duration of debt service reserves, it is difficult to say, but you might expect delinquencies and defaults to begin to pick up,” said Patrick McQuinn, senior director of CMBS ratings at Kroll.
When examining CMBS deals that contained loans secured by student housing, assisted living and independent living properties, market participants observed that more of the loans were included in Freddie Mac’s K-Deals than private-label deals. That’s due to the fact developers find the GSEs offering more competitive financing, as part of their mission to support affordable multifamily housing, including student housing.
David Burkholder, a partner at Cadwalader, Wickersham & Taft, said student-housing properties assets are a difficult asset for most CMBS pools, even without the overlay of COVID stresses.
The student housing sub-type incurs higher upkeep costs, with a higher tenancy churn that regular housing, as well as shorter lease periods, Burkholder said. There is also a tight leasing window year for the properties, which "introduces a risk that if you have a manager that misses the leasing window, there is a significant down-side risk," Burkholder said. "There are not a lot of students signing leases after the start of an academic year."
So adding further risk from university closings due to the pandemic, Burkholder said, means “student housing will be a tough sell to B buyers in conduit deals.”
Post-coronavirus conduit deals still have to contend with pressures from a slowed economy, and dealmakers have been taking steps to insulate against shortfalls in servicing, whether or not they have the three subtypes in the pools. Kroll, for instance, noticed an uptick in the inclusion of debt-service reserves in CMBS conduits. Kroll did not track DSR levels since loans typically did not include them, but the agency now tracks reserves totaling between 13%-31% of a deal balance, according to the agency.
As for what longer-term impacts the market can expect, Burkholder says that depends on how well the economy recovers as the country works its way out of the pandemic.
Lenders will apply their experience to what discounts should be applied to the expected revenue and expenses of transactions secured by student housing, assisted living and independent living loans, Burkholder said.
Now, colleges and universities are weeks into the 2020-2021 academic year, and reports continue to surface of infection spikes, even on campuses that had opted for virtual lectures.
What effects the COVID-19 fallout will have on college campuses — as with all affected property types — depends on how well the pandemic can be brought under control, says Nitin Bhasin, a senior managing director and co-head of CMBS ratings at Kroll.
"If the universities are closed — or, even if they are open and doing mostly remote learning — many students might choose to stay home,” Bhasin said. “Also, the enrollment level might suffer if students take time off."
