JLL’s Lindsay Stowell and James Birkey describe how financing challenges are being overcome.

senior housing development

Lindsay Stowell and James Birkey

Colleges and universities wishing to develop new housing to meet growing enrollment or replace outdated facilities to improve recruitment are facing challenging times with interest rates at a 15-year high.

At the same time, amidst the public dialogue about the rising cost of higher education, many colleges and universities feel pressured to improve housing affordability. Where student housing was considered to be a revenue generator in better times, keeping the price point at an affordable level for students is important today—and difficult to do when construction costs are high.

With challenges come creative solutions, and investors and universities alike are finding ways to meet the needs despite the headwinds.

Financing alternatives

Investors are thinking outside the box to finance construction and acquisitions. For example, some are structuring bond debt with 35-year or greater amortization periods rather than the more conventional 20-to 30-year amortization. While a longer amortization period translates into more interest payments overall, it also means the project sponsor can offer lower, more affordable rents. Long interest-only periods are also in vogue, allowing borrowers to meet near-term debt-service coverage targets.

The inverted yield curve shows long-term interest rates with lower yield than short-term rates and brings into question traditional financing approaches for this asset class. With short-term risk and corresponding benchmark rates high, foregoing construction financing and closing on long-term debt priced on a 20- to 30-year treasury rate may be an optimal solution. Allowing for more equity in the capital stack as well as refinancing flexibility can also be important considerations.

Optimizing the construction budget

Institutions and investors that have already launched projects are now revisiting their plans to keep costs from skyrocketing. That can mean right-sizing a project to fit the budget by reducing the number of beds or eliminating some amenities or social spaces. Value-engineering—always important for maximizing the value of the budget—has come to the forefront as project sponsors look for ways to save. An experienced project manager can find imaginative ways to reduce project costs without sacrificing quality, such as using different materials or making design alterations that simplify construction.

Exploring acquisitions

Acquiring off-campus housing is often cheaper than constructing new projects, and this option is becoming increasingly more interesting for colleges universities, particularly for campus-edge properties. For those who own or invest in multifamily properties near a college campus, now could be a good time to sell if the local university is experiencing a housing crunch.

Some universities with strong credit ratings still have access to some of the cheapest cost of capital available, or they may be able to use cash to mitigate the impact of the currently high-interest-rate environment.

Public-private partnerships (P3s) are still an option

Many colleges and universities have created P3s to fund and deliver student housing. While the P3 model is still viable, the high cost of debt has made financial feasibility more challenging for private developer partners. Today, a higher education P3 may require financial support from the university in the form of reduced or no ground rent payments, leasebacks or bed guarantees, or direct investment into site and infrastructure work. In addition, host municipalities are being asked to contribute through property tax abatement and/or other support to make a housing P3 feasible. These needs contribute to the already complex task of shaping a successful P3 agreement.

Despite the issues, higher education institutions and investors are finding ways to increase student housing availability, albeit cautiously. The more challenging the environment, the more important it is to explore all alternatives with creative financing and project management approaches.

Lindsay Stowell is an executive vice president for JLL’s Government, Education and Non-Profit practice and is focused on strategic real estate and development advisory for higher education organizations across the country. James Birkey is a senior vice president leading JLL’s dedicated Government, Education and Non-Profit practice group in the western U.S.