Fall semester uncertainty leaves student housing P3s in limbo

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Student housing projects financed through public-private partnerships, already wounded by a shortened spring semester, could face default if the COVID-19 pandemic prevents college campuses from opening this fall, or cuts short a fall semester.

Most colleges' privatized housing projects emptied in early March, when classes were shifted from in-person to online in response to the coronavirus pandemic, prompting prorated refunds to be offered for the remainder of the students’ lease arrangements.

A remote learning model “would certainly create a big increase in default risk” on privatized student housing projects, said Robert Labes, partner at law firm Squire Patton Bogg.

While the vast majority of higher education institutions have announced plans to reopen on campus for the fall semester, schools are also forming contingency plans to revert to visual learning if the virus' spread resumes. Moody’s analyst Florence Zeman said demand for on-campus housing would plummet for the for the next year if fall classes were forced online, since it would cause many students to defer enrollment until fall 2021.

“At the end of the day it is going to come down whether these projects will have sufficient debt service,” Zeman said. “It will be a matter of what support the universities provide.”

Zeman said student housing P3 projects will likely be confronting occupancy challenges this fall even if classes do resume on campus, since lingering concerns about the virus may create reluctance to live in dorms. Reduced tuition revenue from enrollment losses would likely prevent many affiliated universities from continuing to cover lost rental revenue for these projects beyond the spring semester, since, in most cases, schools are not contractually obliged to provide financial support, according to Zeman.

Robert Labes, partner at law firm Squire Patton Boggs. said student housing projects could take major hits to their debt service reserve funds if colleges can’t re-open in the fall, or if a second wave of the virus forces a mid-semester switch to remote learning.

“It would certainly create a big increase in default risk,” Labes said. “It would be potentially very significant.”

Many privatized student housing projects with strong ties to their affiliated college got a boost toward debt service requirements in the spring semester with schools covering costs of refunds and credits to tenants forced to vacate, according to Moody’s.

Texas A&M University-Corpus Christi, for example, gave tuition credit to student tenants who moved out of the Islander Housing Miramar and Momentum Village projects. Moody’s rates the Islander Housing and Momentum Village projects at Ba1 and B3, respectively, with negative outlooks.

“We’re going to be watching what is going to happen in the fall very closely,” Zeman said. “We will look at the reserves that support these projects.”

Labes said P3 housing projects catering to college students, but lacking formal partnerships with schools, face more risk since they don’t have the benefit of receiving financial support from a university, if needed. These non-university related student housing projects have one advantage, though, since they could offer more flexible lease options that could attract students he added.

“For P3 projects affiliated with a university there are minimum and maximum rent levels they have to charge,” Labes said. “If you are private operator without an affiliated relationship, you can rent to what the market will bear and you can offer shorter leases.”

Besides posiible enrollment issues, housing operators face increased costs to clean and sanitize rental units. Labes said this added expense will be hard to pass on to student-tenants and will likely cause operators to dip into their operating reserves.

S&P Global Ratings revised its outlook on. U.S. higher education privatized student housing projects to negative on March 25 citing a potentially prolonged decline in occupancy. It rates 63 private student housing projects, with ratings between A-plus and CC with around a quarter of its credits at junk level.

Robert Kelchen, a higher education finance professor at Seton Hall University in South Orange, New Jersey, said schools are considering revenues from residence halls in decisions about fall semester plans.

“Colleges with more students in campus housing, whether owned by the university or developed through a partnership with the private sector, seem to be pushing harder to have on-campus classes in the fall in order to get those housing dollars,” Kelchen said. “Housing and dining revenue is at much greater risk than tuition revenue, so colleges that are reliant on that source of revenue will try to open housing if at all possible.”

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