Student Housing Q&A – A Conversation with Will Baker – Managing Director – Multi-Family Finance – Walker & Dunlop

Will Baker began his career with Walker & Dunlop in 2002. At the time, W&D had 1 office in Bethesda, Maryland with approximately 70 employees. Today, W&D has over 700 employees in 30+ offices throughout the United States. During his 17 year tenure, Will has been instrumental in establishing W&D as today’s preeminent agency lender in the student housing space. I connected with Will shortly after hearing him speak at a student housing conference in Philadelphia earlier this summer and he was kind enough to be the focus of this Q&A edition.

SL: How did you get started in student housing lending?

WB: I initially stumbled into student housing in 2004 when I left underwriting and got into production.  During these “pre-recession” times, the CMBS lenders won the vast majority of deals I competed for due to their extremely aggressive terms. I quickly realized that I needed to find a niche where there was a bit less competition.  The first loan I ever originated was a refinance of a small student housing asset at Cornell University in Ithaca, NY.  I started attending a few student housing conferences, which were about 1/10 the size of the multiple student housing events happening all over the country today.

SL: What is Fannie and Freddy’s role in student housing lending?

WB: Fannie and Freddie have been in student housing for a long time but really started to become the “go to” lenders in the space after 2007. Once the credit crunch had begun, they were two of very few options out there still lending money.  Both agencies have made a point to be at the main industry events to spread the latest news on each of their lending products and really make efforts to get to know the student housing owners in the space.  Fannie and Freddie make up the vast majority of all permanent financings in the student housing sector, far more than the 40-50% market share they enjoy on the conventional multi-family side.

SL: What are the differences between Fannie and Freddy? What are the asset characteristics each are looking for? 

WB: One of the main differences is that Freddie Mac is more regionally focused, whereas Fannie assigns one team to a DUS (Delegated Underwriting and Servicing) lender that they cover nationwide.  Each of the agencies’ lending parameters in student housing are pretty similar, which is why it is very important that you give both of them an opportunity to compete for your business if you are looking for a loan.  Often, the pendulum swings from one agency to the other during the year as far as who will be most aggressive on their financing bid.  A lot depends on what kind of loan exposure the agency has in a particular market or how much business they have done with a particular borrower.  It is vitally important to work with a lender that really understands student housing and knows what each of the agencies are looking for in the quote package.  I often try to get someone from Fannie or Freddie to visit the asset in person so that they get a better feel for the deal and understand what the investment plan is of the borrower.

SL: What are the current mortgage terms for a stable, TIER 1 pedestrian asset? LTV, Rate, I/O, AMORT period, Term, etc.?

WB: 75% LTV, 4-5 years I/O and 30-year AMORT. 10-year term with a rate spread 180-200 bps over the 10 year treasury (will be less for properties qualifying for “green” anywhere between 10 and 40 bps).  Also, spreads will be less for every ‘nickel’ below 75% LTV.   Agencies will consider going to a 1.25x DSC for very select Tier 1 markets if the property is a pedestrian distance to campus.

SL: What are the differences in terms for non-pedestrian/TIER 2/TIER 3 schools, etc.?

WB: Basically the same as Tier 1, but possibly up to a 1.35x DSC and a max LTV of 70% (there may be less I/O offered in Tier 2 or 3 markets as well).

SL: On the panel in Philadelphia, you had mentioned a slowdown in lending which has since picked back up. Can you elaborate?

WB: The slowdown we saw in April/May was very brief and happened because of how much Q1 business each of the agencies did in 2019.  They each have a lending cap of $35B and can do as much “uncapped” business as they want.  In order for a loan to be uncapped, it has to either be: manufactured housing, affordable housing, or green housing.  Since student housing doesn’t apply to the first two, we are making great efforts to explore how to make student housing assets qualify for the green rewards program from each of the agencies. That way, it will qualify as “uncapped”, yielding much better terms.

In order to qualify, we must engage a “green report” which lays out what steps a borrower can take to reduce electric and water consumption by at least 15% each. (This is a higher hurdle from 2018, where the borrower only had to reduce consumption of water OR electric by 30%).  A lot of the water consumption reductions can come from low flow toilets and new shower heads, whereas most energy reduction is coming from LED lighting and ‘smart thermostats’.  We are even exploring solar options on newer student housing deals that may already have the LED lighting.  The cost of the panels is coming down every year and if you have sufficient roof space on your building, it’s worth looking into.

SL: Has there been an uptick in troubled student loans/special servicing/foreclosures etc.? 

WB: There has been an uptick in the percentage of watch list loans that are coming from student housing deals vs conventional loans, which is partly due to supply issues in some markets.  The agencies have not made any major changes in their underwriting parameters, but it’s certainly something to keep an eye on in the event the percentage of watch list loans continues to increase (“watch list” means the debt service coverage (DSC) of the borrower has fallen significantly below where it was underwritten).

SL: What are your thoughts for the remainder of 2019?

WB: Given that the 10 year is currently hovering around 2.0% and a borrower can get 75% LTV debt with 5 years i/o at just over 4%, I suspect financing activity for the rest of the year will be strong.  Despite the average student housing cap rate in 2018 being around 5.75%, it wouldn’t surprise me to see that move down a bit this year based on how cheap debt is at the moment.  As always, we will be watching lease ups very closely in August & September to make sure demand is keeping up with supply in all the markets we are involved with.

SL: Is there anything else that you want to convey to the market?

WB: While student housing was certainly considered a ‘niche’ product when I got into it in 2004, it is most assuredly not niche anymore.  There are major sovereign wealth funds, private equity players and massive domestic funds who have invested heavily in the space.  While there has been a lot of supply over the past 5-10 years, for the most part, markets have absorbed the supply and the properties have continued to exhibit strong rent growth due to increasing enrollment trends.

I am encouraged that many of the student housing properties we work on qualify for the agency green financing programs and I am hopeful that solar will be a bigger part of this industry as renewable energy prices continue to decline.

There are some staggering statistics out there about the extraordinarily high percentage (over 45%) of students in major institutions that are food insecure (limited or uncertain access to food) because of their high cost of living. While the lack of adequate affordable housing in conventional multi family is pretty widely known, not many people are aware of the affordability crisis hitting the student housing market as well.  I am hopeful the agencies can figure out a way to incorporate student housing into their existing affordable housing programs, so long as a borrower agrees to set aside a certain percentage of beds to lower income students/households (as determined by area median income).

 Will Baker

With over 17 years of experience in multifamily finance, Will Baker, managing director, is responsible for multifamily loan originations with a focus on student housing properties and manufactured housing communities throughout the country. Mr. Baker also focuses on conventional multifamily loan originations through Fannie Mae, Freddie Mac, Bridge, CMBS and HUD executions. Throughout his career, Mr. Baker has originated over $9.0 billion in Agency financing throughout the United States, including over $4.0 billion from 2016-2018.

Mr. Baker earned a bachelor’s degree in economics from the Williams School of Commerce, Economics, and Politics at Washington & Lee University in 2001. He is involved with the Monday Morning Quarterback Club and Kiwanis Club in Birmingham. He and his wife Susannah live in Birmingham, Alabama with their son Wilson and two daughters, Eliza & Annie.