Student Housing: A Sector in Peril?

The pandemic created immense disruption across the municipal market, particularly in the student housing sector. But with volatility comes opportunity.

Vander Shanholt

Vander Shanholt Vice President, Research Analyst Franklin Templeton Fixed Income

PREVIEW

For many years, colleges and universities across the United States have faced challenges arising from aging facilities. While some schools are able to borrow directly or leverage a large alumni base to fund capital improvements, a number of both public and private schools have utilized tax-exempt financing to fund the construction of privatized student housing projects. These public-private partnerships, otherwise known as P3s, have increasingly become the workaround for chronic gaps in public funding. Between 2010 and 2019, there was approximately US$11.1 billion of tax-exempt debt issued to finance P3 projects, including US$6.7 billion over the last five years.1 It is important to note that 2018 saw an abnormally high number of P3 issuance in terms of par amount due to a couple of large transactions, including an over US$500 million issuance for a project at the University of California-Davis. In 2019, we saw issuance return closer to what we have seen in previous years.

There is no question the COVID-19 pandemic has materially impacted the student housing sector. As cases increased in March, nearly every college and university closed its campus for the remainder of the spring semester and ordered students to depart on-campus housing facilities.

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WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Because municipal bonds are sensitive to interest rate movements, a municipal bond portfolio’s yield and value will fluctuate with market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the portfolio’s value may decline. Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

ENDNOTES

  1. Source: RBC Capital Markets, P3 Higher Education Market Overview, August 2020.