Empty dorms are putting pressure on U.S. colleges to help investors in the approximately $14 billion student housing debt market, adding to the strain on schools already reeling from the pandemic.
West Virginia State University, already hit with a 10% enrollment drop, plans to give money to a school foundation so it can meet its bond covenants for residence hall debt. A community college in Ohio is using part of a $1.5 million donation for a financially-strapped student housing project. And officials at New Jersey City University, which serves largely first-generation and lower-income students and has recorded years of deficits, are prepared to shore up a dorm there.
The squeeze on university finances arrives at the worst possible time. Some debt sold for student housing requires the schools to assist. Other colleges are chipping in even without that requirement to ensure dorms are available when campuses fully reopen. On top of that, enrollments are dwindling and cash flow from athletics, dining halls and parking has disappeared.
“The limiting factor is some of these schools themselves are facing uncertainty with many of their revenue streams,” S&P Global Ratings analyst Amber Schafer said in an interview. “It’s a matter of not only willingness, but if they’re able to support the project.”
Shrinking Enrollment
Investors have billions of dollars relying on the outcome. Typically, privatized student housing debt is paid off by the revenue generated by the dorms -- meaning there’s little recourse for bondholders if things go south. With fewer students on campus, options are limited. The number of first-year undergraduate students enrolled dropped 16% this semester, the National Student Clearinghouse Research Center said in a report last week.
The constraints facing student housing could worsen as the coronavirus continues to spread across the U.S., making it harder for colleges to reopen. Since March, S&P has downgraded 15 student housing borrowers in a universe of the about 60 borrowers that it rates, while Moody’s Investors Service has slashed the rating on five considered public-private partnerships.
Nine student housing projects have become impaired in 2020, the most since 2009, according to Municipal Market Analytics, which tracks actions by municipal borrowers like defaults, reserve withdrawals, and technical defaults.
Borrowers have begun revealing how empty residence halls are as the pandemic spurs many campuses to keep classes online. West Virginia State University’s dorm is 71% full, putting it about 20 percentage points from where it needs to be to satisfy debt covenants, according to the school foundation that sold the debt. Other privatized student housing projects, like two on Howard University’s campus, are virtually empty due to online-only instruction there.
On The Hook
Privatized dorms are struggling the most given that they weren’t structured to withstand 20% to 30% drops in occupancy -- or no students at all.
West Virginia State University may have to step in to help student housing bonds at risk of violating a debt service coverage ratio, Moody’s warned this month. The historically-black college faces “considerable” challenges in backstopping the bonds, Moody’s said.