Student Housing Business • September/October 2020 • Page 48

INVESTMENT SALES in part driven by the current preferences of the agencies pertain-ing to debt ﬁ nancing.” Debt ﬁ nancing — especially by the GSEs — has gotten harder to obtain dur-ing the pandemic as they closely watched KEVIN LARIMER the investment mar-Senior Managing ket. That has led, in Director, part, to the slowdown Berkadia as buyers and devel-opers seek alternative sources of capital. Some of those sourc-es — chieﬂ y, interna-tional capital — are constrained by their ability to travel to the United States during the pandemic to per-form due diligence on assets. “Even for stabilized BRANDON BUELL product, agencies are Senior Managing largely only working Director, with existing borrow-Berkadia ers,” says Pierce. Many in the indus-try say that the debt markets are thawing now that the industry is seeing occupancy play out positively this fall. With students back at school — even when school is virtual — lenders are willing to look at deals. “Lenders have been waiting to see how col-lections faired during these ﬁ rst two months of the fall semester,” says Kevin Larimer, se-nior managing director of student housing at Berkadia. “As numbers continue to come in, we are hearing very encouraging reports across the country with collections outpacing most other asset classes. Interest rates remain favor-able. We see the delay to increase loan-to-value ratios and reduce the interest rate reserves af-fecting the deal ﬂ ow more than normal. It is our hope that lenders further acknowledge the strength of the global student housing sector on how it has performed during the global pan-demic and how it performed during the Great Recession.” While there is still capital trickling into the market, domestic private debt funds dialed back their activity in the space during the spring and summer, with most taking time to analyze their existing portfolios and invest-ments during the pandemic. That has been another roadblock for acquisition activity in the sector. “Many sellers realize that the norms that existed on March 1 are non-existent today,” says Andrew Layton, chief acquisition ofﬁ cer of Student Quarters. “They know that domes-tic capital is just not there at the moment. The 48 September/October 2020 domestic private equity partners are largely sitting on the sidelines.” “The agencies and banks, to a lesser degree, are still actively lending so stabilized proper-ties are trading,” says Rogers. “That said, with the debt funds on the sidelines, there are few debt options for deals that haven’t yet sta-bilized, signiﬁ cantly reducing non-stabilized deal ﬂ ow.” That’s a big roadblock for some buyers. “It would be a great time to buy,” says Lay-ton. “The issue is not the operators; our ap-petite is as voracious as ever. I don’t think the same can be said for the capital providers. The biggest issue right now is debt. Loan proceeds are less, interest-only periods are less, and rates are not what they were. The only way to hit the returns we were modeling in March is to lower the price. I am not sure many sellers under-stand this or want to hear it.” What Will Drive Sellers To The Market? Many buyers have been waiting for a wave of distressed assets to hit the market. Those in the industry are quick to note this hasn’t material-ized. Nor is it incredibly likely that a “wave” will hit in the future. DBRS Morningstar is-sued a commentary in May titled “The Next Falling Star: Student Housing” that had many in the industry rattled. The report discussed oversupply in many markets that could lead to some distress in the CMBS loans guaranteed by those properties. In early October, the company issued commentary in a weekly report citing positive metrics that were taking place in the off-campus student housing industry this fall, chief among them occupancy. “During the spring and summer, very few transactions were getting done as sell-ers weren’t in distress and buyers wanted a ‘COVID discount,’ making it difﬁ cult to gauge pricing,” says Rogers. “Now that we have clar-ity for this year’s rent rolls, however, pric-ing seems to be generally consistent with pre-COVID levels for stabilized deals at Tier 1 schools. Buyers now have conﬁ dence in what their cash ﬂ ows are going to look like and the agencies are lending at very attractive rates.” While that COVID discount hasn’t material-ized, it doesn’t mean some small amounts of distress — caused by the usual symptoms of occupancy, loan maturity and lack of capital expenditure — may come to market. “We are going to start seeing a few distressed properties enter the market,” says Fitts. “There are certainly some loans in special servicing and some on the watch list from the debt per-spective. A lot of that may not shake loose in the near future.” Along with those deals are some relatively normal term expriations on partnerships, ven-tures and loans that may drive sales to the market. “There are some sellers contemplating loan maturities and others approaching the end of their fund life, requiring them to continue with their planned exit strategies,” says Brandon Buell, senior managing director at Berkadia. “In addition to that, we will likely see some assets brought to market that didn’t fully sta-bilize, which will also encourage dispositions.” As the fall moves forward, more deals are headed to market, say brokers and those watch-ing the market to acquire. “Sellers were deﬁ nitely hesitant to market their properties for sale during the spring and summer months, but that attitude is changing,” says Austin Repetto, principal at TSB Realty. “We’ve seen great momentum over the past 30 to 60 days for increased deal ﬂ ow and a strong push for closings by the end of the year.” “We are working on several deals that we hope to have close by the end of the year,” says Andrew Stark, principal of Timberline Real Es-tate Ventures. “It’s a different world. Lenders, sellers and insurance have changed the game. I think we are going to see more sales in the fourth quarter than we have seen all year. We are going to see a ﬂ urry of deals, but I don’t think it will be nearly the size that it normally is.” Repetto says that he is seeing two dis-tinct groups looking to acquire as he mar-kets properties this fall. The ﬁ rst group is buyers seeking to ac-quire assets that are distressed in some fashion. The second group is those buyers who see COVID as an AUSTIN REPETTO interruption. Principal, “They are looking TSB Realty beyond the pandemic impact for acquisi-tion opportunities,” he says, “and their pricing is at approxi-mately pre-pandemic levels.” One factor that is not keeping sell-ers from the market: COVID-19. “We have contin-ued to see strong fundamentals across the sector, even with ANDREW STARK COVID,” says Fitts. Principal, “There are not a ton of Timberline Real Estate sellers who are elect-Ventures ing to not go to market because of COVID.” On the buyer side, there are some concerns that may linger after COVID that cause some investors to pause, say those in the industry. “Buyers remain cautiously optimistic that COVID is a mere blip on the radar in a strong StudentHousingBusiness.com