While the student housing market has been a bright spot for the multifamily industry this year, lenders are growing more conservative in their approach to the sector.

Even in this troubled economy, student housing shines. While rents continue to fall for conventional multifamily properties across the nation, many student housing operators predict flat or modest rent growth from the most recent lease-up season. And demographics, combined with a limited amount of new supply coming online in the next two years, should position the sector for continued rent and occupancy growth.

“There are states where the market-rate business is very soft, but the student business may be very solid,” says Frank Lutz, a vice president focused on student housing at Washington, D.C.-based Fannie Mae. “For instance, you look at Michigan State and the University of Michigan, and you can cut them out of some of the economic woes that are going on in that state.”

Despite this, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have both reined in their underwriting on student housing deals this year. Freddie Mac raised its debt service coverage ratio (DSCR) to 1.35x in late August and also moved the loan-to-value (LTV) ratio to 75 percent earlier this year. Fannie has similarly tightened up: 75 percent LTV is the new ceiling, and partial interest-only periods are no longer offered.

With lenders approaching this seemingly recession-resistant sector with more trepidation, some are asking: why the disconnect? Part of the reason is a lack of current, reliable data for the highly fragmented industry.

Keeping Close Watch 

Lenders are anxiously watching the current lease-up season to determine just how resilient student housing is. “The theory that this segment is recession-resistant makes sense on paper and in theory, but we’ll see how it plays out,” says Mitch Kiffe, vice president of sales at McLean, Va.-based Freddie Mac. “There is still a lack of visibility with what’s really going to happen. The industry broadly needs to get better at collecting and disseminating data.”

Lenders are also less willing to be aggressive because student housing is a niche area with its own property management skill set. When considering a deal, lenders must mull the possibility of having to take a property back from the owner in case of default. “There are a limited number of really capable, qualified, great operators,” Lutz says. “If you’re forced to take something back, you can’t easily take a non-student housing operator and let them step in on that deal and assume it will operate with the same efficiency.”

Other factors contribute to student housing deals being priced higher and underwritten tighter, GSE executives say. Fannie Mae and Freddie Mac are increasingly securitizing student-housing loans, yet the investor appetite for this space is more limited than for loans backing conventional apartments.

The Good News

Still, the demographics paint a favorable picture for student housing. The Echo Boom generation, numbered at 88.5 million, is as large as the Baby Boomer generation, and the number of those turning 18 is expected to peak in 2010, at 5 million. That number should remain above the 5 million mark through 2020, estimates the U.S. Census Bureau.

What's more, the average freshman class is growing by about 2 percent annually, and a recent survey found that private colleges admitted 8.7 percent more students this year, while public colleges admitted 3.1 percent more students this year, according to theChronicle of Higher Education.

Lastly, the supply and demand of student housing is well-balanced, and the lack of construction capital on the market, combined with the fact that many schools are struggling with their budgets, should keep it that way. “The good news is that once the properties in the pipeline get delivered, it will be a while before there’s new supply coming on,” Kiffe says. “If you fast forward two or three years, there probably won’t be a lot of new supply coming online.”

Different Metrics, Decent Prices

Despite the stricter underwriting, a strong borrower can still get a 10-year student-housing mortgage with all-in rates in the low- to mid-6 percent range from the agencies.

Fannie Mae entered the student housing industry in 2001. But it wasn’t until last year that Freddie Mac rolled out its dedicated student housing mortgage, processing about $580 million in 2008. The company is on a similar pace this year, having done between $250 million and $300 million in student housing deals through July.

The classification of student housing deals varies from lender to lender. Fannie Mae considers a student housing property as one where more than 20 percent of the occupants are students. Freddie Mac sets the bar higher, at 50 percent. Yet Freddie is more willing to consider funding projects at smaller schools: The company looks for deals at schools with at least 8,000 students, while Fannie Mae targets schools with enrollments of 20,000 or more.