June 21, 2020

Ann Arbor’s student housing market uncertain as UM stays quiet about plans for fall semester

Ann Arbor's student housing market uncertain as UM stays quiet about plans for fall semester


Joe Mifsud, director of property management at Ann Arbor-based Oxford Cos., which manages 100 properties with 900 or so beds, including the buildings at 808 Oakland, 912 South Forest, 731 Packard and 1001 East University, said only a handful of people have expressed that they will not be returning to campus in the fall, regardless of what the university says in its plans.

“I don’t know of any groups of students that are hard lobbying the university to not have on-campus classes,” he said. “I think for the most part, students want their college experience, and they just want to make sure the university is doing what it has to do to make sure it’s as safe as possible.”

According to CoStar Group Inc., a Washington, D.C.-based real estate information service, there are approximately 30,000 apartments in the market — not including things like single-family homes rented out to students, for example — with a vacancy rate of 4.9 percent, well below the national average of 6.8 percent. The asking rent per unit is $1,242 per month. Asking rents have increased dramatically in 10 years, rising 39 percent from $893 in the second quarter of 2010.

Universities in Michigan abruptly shifted to online/distance learning in the spring semester as COVID-19 spread throughout the state, claiming nearly 5,800 lives to date.

Some analysts say that if that continues into the fall, there could be trouble for property owners, who may be forced to turn over the keys if they can’t pay their mortgages.

DBRS Morningstar, a division of Chicago-based Morningstar Inc., said in a report last month that $13.33 billion in commercial mortgage-backed securities debt is at risk as a result of the pandemic as colleges and universities shutter in favor of online learning.

That leaves private off-campus apartment operators in the lurch, waiting to see what that means for their core tenant base: young students.

Fewer students paying for amenity-rich off-campus housing means fewer leases and rent collections for their owners, straining cash flow for debt servicing.

“Should full-time online learning continue into the Fall 2020 semester for most higher-education institutions, student housing properties may not fully recover until Fall 2022, which supports the sentiment that full economic recovery will take years rather than months and could affect more than $13.33 billion (in 667 nondefeased) student housing loans packaged in commercial mortgage-backed securities,” Morningstar wrote in its analysis.

Private off-campus housing has increased in the last 20 or so years as the large millennial generation headed off to college, putting pressure on the existing dorm stock on campuses, Morningstar says.

Coupled with decreased state funding for universities nationwide to build new student housing, that has led to a rise in off-campus housing investment by private companies betting on a virtually built-in corps of young tenants, even during down periods.

The Morningstar report says the National Center for Education Statistics notes a 27 percent increase in full-time undergraduate students from 2000 to 2017, rising from 13.2 million to 16.8 million. That has translated into more than 400,000 new student housing beds since 2010, the Morningstar report says, citing the National Multifamily Housing Council.

But there were problems looming, the company says. Increased student housing competition, more requirements that students live on campus and a decline in international students in the U.S. have caused a decline in CMBS performance in private student housing.

Loan delinquency rates were 3.8 percent in that sector in April, compared to just 1.6 percent for all CMBS loans. In January 2018, the sector was 0.2 percent delinquent, compared to 3.5 percent for all loans. But then this month, student housing loans were 9.5 percent delinquent as vacancies and broken leases and rent collection issues took their toll, according to Morningstar.

Michigan has $346.6 million in private student housing CMBS debt, placing it in the top 20 percent for overall debt load nationally, Morningstar says. However, it’s in the top five ($263.1 million) when stripped of its Fannie Mae and Freddie Mac loans, which are subject to forbearance provisions due to the COVID-19 pandemic.

Michigan trails only Texas ($413.8 million) and New York ($304.6 million) in nonagency CMBS debt for student housing, per Morningstar’s analysis.

Trepp notes that short-term effects of the pandemic include a hike to 4.72 percent in April from 1.25 percent in March of loans that are either in a grace period or late beyond the grace period but less than 30 days late, which gives an indication of loans that may become delinquent.

Still, it’s too early to tell what the future has in store for the private student housing market in Ann Arbor, Mifsud said.

“Anybody you would talk to that has an answer to that is full of shit,” he said.

“There is just no way to possibly know. We went from worrying about new construction starts and new beds coming online to whether there is going to be a university that actually has people on campus. Until we have a better idea of what the resurgence (of the virus) is going to be and when this vaccine is going to be available, I really don’t see how anybody can give an intelligent answer on that.”



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