Lender confidence has fueled the student housing boom for the past two years. But now, some of the bigger markets are being overbuilt and some lenders have become wary.

Before, “there was a wide [interest rate] spread between student housing and market-rate loans,” said Curtis Palmer, managing director for Multi Housing Capital Advisors, a division of nationwide broker Transwestern Commercial Services. “You might have seen 100 to 150 basis points between them. Now it has narrowed to between 10 and 15 basis points, which is negligible.”

The overbuilding happened because the growth rates projected by universities and colleges were unmet, he added. “A lot of the pipeline has curtailed fairly dramatically,” Palmer said.

Student housing has been selling with an average cap rate of 6%, which is declining but is still about 1% higher than the cap rate for typical multifamily, said Mark Bryant, senior vice president of student living and Texas development operations for JPI, a student housing developer.

Just 24 months ago, cap rates for student housing were between 7% and 7.5%. “Student housing has been more widely accepted,” said Bryant.

The rush to build has forced one developer, Conquest Student Housing, to halt construction around the University of Southern California (USC) campus in Los Angeles. Two of its projects originally scheduled to break ground last year were postponed.

“There’s been a lot of housing units being built in downtown a mile from campus” including those from competing student housing developers, said Alan Smolinisky, a principal at Conquest. “The freshman class has also decreased a little bit, from 3,100 to 2,900.”

Smolinisky said that Conquest will focus on rehabilitation deals for the next few years. Conquest’s primary market is USC, but it recently started acquiring and rehabbing student housing near the University of California, Santa Barbara.

Conquest is finishing construction on its first mixed-use project, the $42 million Tuscany at USC. The 120-unit, 512-bed project will open in August 2006, and units were 50% preleased at press time. It will have 10,560 square feet of commercial space for restaurants and shops. Conquest will also be headquartered there.

“Student housing is high risk and high reward,” said Smolinisky. “When the kids are in session, it can be 100% full at good rents for a whole year.”

Unfortunately, insurance and maintenance costs remain high, Smolinisky added. Insurance can be 30% to 40% higher than for a conventional multifamily project because students cause more wear and tear than other residents.

Some lenders also see student housing as a particular niche where they wouldn’t be comfortable managing projects in case of foreclosure, he said. “They felt burned by student housing in the past and are now out of the business.”

For the Tuscany project, George Smith Partners, Inc., helped arrange a $38 million construction loan from Fremont Investment & Loan. Conquest provided developer equity for the rest of the financing.

Gary Tenzer, executive vice president for George Smith, said he was able to help lower the loan pricing for Conquest because it is a developer with a good track record.

“The pricing is as good as any high-quality apartment building,” said Tenzer. “Typically, reserves are underwritten 25% to 50% higher than a standard apartment deal. In Conquest’s transaction, there was very little premium, if any at all.”

Green Park goes beyond DUS

Green Park Financial, L.P., has had great success with Fannie Mae’s Delegated Underwriting and Servicing product for student housing.

Since 2001, the lender has completed 25 deals under this program, along with a $150 million student housing credit facility, said Andrew Tapley, vice president. "We were the ones who convinced Fannie Mae that they'd want to be involved with this product."

However, Green Park has also started looking into financing student housing with commercial mortgage-backed securities (CMBS). "We just offered this [a year ago] because we were missing out on deals," said Tapley.

CMBS can finance deals that are further from campus, with up to an 80% loan-to-value ratio, a debt service coverage ratio as low as 1.20x, and terms of five to 10 years.