A mystery buyer has apparently agreed to buy $725 million in debt on two of San Francisco’s largest hotels, reported the San Francisco Business Times. The 1,921-key Hilton San Francisco Union Square and 1,024-key Parc 55 San Francisco have been under court-appointed receivership since the fall of 2023, after owner Park Hotels & Resorts handed back the keys.

Eastdil Secured began marketing the debt on the two connected properties this past July. At that time, the two properties were appraised at roughly $554 million by Kroll Bond Rating Agency, a drop of more than $1 billion from their appraised value when the debt was originated.

The Business Times reported that the terms of the sale were still under discussion and the deal has not been finalized. The receiver is under a March 31 deadline to complete the deal or the debt will go back to lender JPMorgan for foreclosure.

An estimated $332 billion in potentially troubled commercial real estate debt is scheduled to mature this year, approximately one-quarter of a total of $1.3 trillion potentially troubled debt coming due between now and 2033, Newmark reported. Although loans tied to office properties comprise more than half the 2024 tally at $184 billion, the apartment sector accounts for nearly a third of the total at $106 billion. 

Moreover, the gap between potentially troubled office maturities and those tied to multifamily loans will shrink in the years to come. In fact, from 2028 through 2033 the apartment sector will contribute a larger share of potentially troubled maturities than office, although the dollar volumes of pending maturities in each sector will be smaller compared to this year’s. All told, Newmark reports that $542 billion of office maturities through 2033 are potentially troubled, compared to $550 billion in multifamily. 

Ranked against either office or apartments, retail runs a distant third when it comes to potentially troubled maturing loans, with industrial an even more distant fourth. “The high office volume results from most loans being underwater,” according to Newmark’s latest United States Multifamily Capital Markets Report. “The distribution of LTV ratios for multifamily [is] more favorable overall, but the greater size of the multifamily market and the concentration of lending during the recent liquidity bubble drive nominal exposure.” 

This is the third in a series of articles discussing the student housing sector. “Student Housing in 2023: Stagnation? Or Continued Investor Interest?” and “Educational Overview: Student Housing vs Multifamily” are live and available to read.

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The lack of capital for CRE projects generated a multitude of headlines and expert commentary in 2023. Reports about lender pullback, stricter underwriting requirements, and over-rising interest rates abounded, at least regarding some asset types.

Interestingly, inputting the keywords “student housing” and “financing” into search engines doesn’t lead to many hits. Still, one noteworthy article from September 2023 was in the Crittenden Report. The article explained that student housing was a favored asset class, with available equity and debt from institutional sources and life companies. The report indicated that this liquidity wasn’t available to anyone. The sponsors in question had to be seasoned builders and operators. Meanwhile, the properties required the right fundamentals (i.e., proximity to campus and amenities).

In exploring student housing and capital markets, experts concurred with much of the Crittenden Report’s assertions. They also told Connect CRE that student housing financing is somewhat of a mixed bag, similar to other asset classes. Capital wasn’t abundant in 2023. However, “you do have a healthy lending environment out there,” observed Andrew Layton, chief acquisition officer with Student Quarters. “This goes back to the strength of the industry.”

Mitchell Korte, Subtext’s Executive Vice President, Development, agreed. “As student housing has evolved into an institutional asset class, we’re seeing increased interest from groups that haven’t historically invested in this product type.”

Agencies and Other Options

One thing that the student housing sector has in its favor versus other real estate types is agency financing.

Fannie Mae and Freddie Mac are multifamily housing lenders; their products also extend to student housing. Fannie Mae has a dedicated student housing team, while Freddie Mac provides student housing-specific loans ranging between $5 million and $100 million.

But GSA money can reach only so far. Other sources have had to step in to fill the gap. PMA’s Senior Project Manager and Student Housing Expert Eric Gould explained that reduced available capital has led developers and universities to find creative ways to finance projects.

“There’s been a significant increase of public-private partnership proposals in the market; this was especially the case toward the end of 2023,” Gould remarked. These arrangements have benefitted both developers and universities. “The money that traditionally would go toward land acquisition is re-allocated back into enhancing the building itself,” Gould said. “The university can benefit from additional revenue in the form of a long-term ground lease with the private entity.”

More traditional entities are dipping their toes in the water, too. “Financing is being found with life companies, debt funds, agencies and banks,” according to Colliers’ Senior Vice President, National Housing Group, Sean Baird.

You read that right. Banks.

Traditional Debt and Equity: A Cautious Approach

The above shouldn’t suggest that banks are throwing money hand over fist to student housing developers, owners and operators. Baird acknowledged that capital from traditional sources was tough to find in 2023 as equity remained on the sidelines. He also said this trend wasn’t different from other real estate sectors. Still, “as interest rates are beginning to flatline and even decline, we’re seeing more participants in the student housing space from an equity and debt standpoint,” he said, adding that banks did step in as agency lending decreased in late 2023.

From a lender standpoint, one thing student housing has going for it is continued growth and solid fundamentals. Champion Real Estate Company’s COO and Partner, Parker Champion, said that growth has opened the door to some financeable investments, though at a higher cost. “Debt funds are still available and remain the most active in the sector,” he observed. However, he observed that banks continue remaining on the sidelines, while higher interest rates mean it’s more challenging to hit debt-coverage ratios.

On the other hand, Layton said he hasn’t seen a lack of appetite from lenders toward student housing. “A lot of what we’ve seen from lenders has been fair, given the environment we find ourselves in,” he noted.

Not Flush With Cash, but Doing Okay

Overall, the experts cite the strength of the student housing sector as appealing to capital markets. Subtext explained that the fundamentals of higher enrollment and rent growth (as well as a slowdown in other investment classes) tell lenders and equity providers a compelling story.

Brent Little, president of Fountain Residential Partners, allowed that while debt and equity were constrained, especially compared to the availability before interest rates began to move, things may be starting to change. “Both debt and equity are easing in the first quarter of 2024 and will continue to flow back into the sector,” he said.

Another compelling story for lenders is the lack of distress in the sector. “Of course, there is some distress, but you’re not seeing that wave of ‘oh, my God, there are hundreds of deals underwater,’” Layton said.

The takeaway from this is that student housing isn’t drowning in capital. Nor are any other real estate sectors. However, the asset class holds its own when finding liquidity. Another positive is that more lenders are coming into the space.

Layton, for one, pointed out that demand for the product from foreign investors has increased. Domestically, “even versus five years ago, there are so many lenders out there that want to be investing in this space,” he added. “This is great because it keeps everyone competitive.”