Student Housing Business

SEP-OCT 2018

Student Housing Business is the voice of the student housing industry.

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Page 26 of 88

QUESTION OF THE MONTH September/October 2018 26 What impact are rising interest rates having on the availability of financing for student housing investment and development deals, and what is the effect of rising rates on the overall lending/capital markets environment? The short answer is that rate hikes have not had much impact on cap rates or valuations, especially for core and core-plus assets. In fact, we continue to see cap rates compress in an interest rate-rising environment, which is contrary to historical trends. While interest rates have climbed 25 to 40 basis points for long-term financing, we've seen cap rates continue a downward trajectory, reaching lows of 4 percent to 4.5 percent for core acquisitions. As student housing becomes more of an institutional property type, un-levered or moderately levered insti- tutional and foreign investors are providing the student housing space with a lower cost of capital for long-term investments. This creates more competition for larger deals and portfolio trades. Overall, the agencies, banks, debt funds and life companies continue to compete with one another over cash flowing assets. Construction financing is also alive and well and has not been impact- ed by the increased long-term interest rates. Lenders are still focused on sponsorship, location, university characteristics and supply. It's been business as usual, and it's been busy. Timothy Bradley, TSB Capital Advisors Rising rates have not impacted the availability of financing. In fact, the inverse has been true. An abun- dance of debt capital has produced a very competitive lending market. That competition has resulted in mate- rial compression in lender spreads throughout the first half of 2018 which offset a significant portion of the index rate growth for all-in rates. We are likely seeing fixed-rate spreads at their bottom. Floating rate spreads have continued to tighten for construction and transi- tional loans. Benjamin Roelke, CBRE | Capital Markets Generally, the student housing industry has been more resilient to interest rate increases than other sectors of real estate. We have not seen a reduction in the avail- ability of financing within the student housing market because of rising interest rates, but there is an impact to the overall financing of a project. Loan proceeds likely will be more compressed with rising interest rates as projects become more constrained by debt service cov- erage ratios. Lower debt proceeds will result in more equity and higher overall costs of capital to the project. Greg Hunter, RISE We've yet to see any impact of rising interest rates on the availability of acquisition financing in the sector. If anything, it seems the slow uptick in rates has helped fuel investment activity as investors look to deploy capital and lock in still historically low long-term debt while it lasts. While we're less involved in the sourcing of development financing, the pursuit of quality devel- opment sites has not slowed. Travis Prince, Cushman & Wakefield Since cap rates have remained steady, or even lowered, over the past 18 to 24 months, rising interest rates are compressing returns to levels below the expecta- tions and thresholds of certain groups that are chasing additional yield that was once a premium over their typical investment strategies. Until cap rates respond to the debt market, higher cost of capital groups could temporarily get pushed out of the space, and thus create declining transaction volume as groups with a cheaper cost of capital get selective with acquisitions. Consequently, this could partially mitigate rising inter- est rates as lenders' allocations go unused and there- fore spreads compress. In terms of development, recent interest rate rises, leverage reduction from construction lenders, and increases in land, labor and material costs are creating an advantage for those with cheaper capital and strong lender relationships as some groups are unable to get out of the ground due to an inability to finance deals. This has created opportunities for us and opened doors for strategic partnerships with local developers. Greg Martini, GMH Capital Partners With regards to agency financing, rising rates have had no effect on the availability of capital. Both agencies still have plenty of room left in their FHFA-mandated caps to finish out the year. Rising rates have had a major effect, however, on the terms that we are able to offer since most of our loans are not debt service con- strained at a 1.30x debt service coverage. Because rates have risen so much, it is harder to underwrite to a max loan to value of 75 percent or 80 percent in a low cap rate environment. Will Baker, Walker & Dunlop Rising rates haven't impacted the availability of financ- ing but have impacted the leverage available. What we've seen thus far is that there has not been an adjust- ment in pricing on acquisitions along with the increase in rates. Therefore a number of deals are being (fur- ther) debt service constrained. This can be particularly impactful for deals coming off construction where the agencies will often look for a higher debt service cover- age threshold for deals without operating history. Peter Benedetto, Berkadia Advertise in STUDENT HOUSING BUSINESS ® Rich Kelley | 914-468-0818 Tim Tolton | 404-832-8262 Contact

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