Student Housing Bubble?

Question

I had an interesting exchange with another local investor that led me to explore some property in the areas immediately surrounding the several high-end universities in our city.  Apart from the challenges of owning rentals that are primarily occupied by students, and the relatively high property values in these areas, I was struck by another concern:

There is a school of thought gaining traction that Higher Education is currently experiencing a huge bubble, and might actually be cresting, if not very close to it. Glenn Reynolds and Jim Rogers have both written quite a bit about this as insiders.

For the last 10 years enrollment has done nothing but increase, along with tuition, and also the unemployment rate of recent graduates. If higher education is a bubble (which I’m inclined to think it is, although I have no skin in that particular game) what does that mean for the markets around the schools?

Chad Benedict · Answer

I worked in higher education administration for 10 years and have actually consulted for universities facing these types of issues (I also have a master's degree in higher ed policy). Higher ed is not a bubble in the way people often think of bubbles. The value of a college degree continues to increase as more and more jobs require it as a bare minimum, and that's not going to change any time soon. A college degree is basically the new high school degree if you want a white collar job--it's a necessity, not an option, so demand is not going to go down based on any type of perceived bubble. Just look at the number of job postings nowadays that say "Bachelor's Degree Required" that didn't say that 30 years ago. I'm not arguing it's right, but that's the way it is.

People have been lamenting the increasing cost of higher education for nearly 100 years, but it still makes economic sense based on increased earnings over your lifetime. The only way demand will go down is if demographics change, i.e., if there are simply fewer people who are college age, and I've seen some projections that say that may be the case within the next few decades. That will certainly have an impact, but it won't be felt equally. Also, the online education portals that are being promoted so heavily are nowhere near the disruptive threat that they'd like to be.

As much as the public likes to focus on the richest and largest schools and skyrocketing tuition, a majority of people attend a state university or community college close to where they grew up. There will definitely be some consolidation in higher ed over the next 50 years, particularly with private liberal arts colleges. Many will close, others will merge. There are also plenty of other regional colleges that will likely falter, some due to internal financial issues, others due to factors outside their control (local factories drying up, people moving to larger cities). I certainly wouldn't buy property in those areas, but you also have to look beyond just the college itself. In general many colleges are self-sustaining within their local communities and are often the largest employer around.

I wouldn't worry about any of the top public or private schools. If you are investing in a smaller town with a regional college, just look at the same fundamentals as you would anywhere else. Is the local economy growing or contracting? Are housing prices going up or down? Are rents going up or staying the same? Is the college's enrollment growing or declining? (This information is public.) When you walk around the college, are the buildings in bad shape and disrepair, or are they expanding and building new buildings? More importantly, are they building any new dorms that will provide competition to local landlords? These will give you some clues to whether or not you should be worried. Even then, the issues most colleges face are longer-term, so if you're planning to hold onto a rental property for 10-20 years, you'd probably still be safe and could get out if you saw any bad signs on the horizon.

Also keep in mind it's not just students who rent, it's also staff and faculty. Even if the college's student population isn't growing, it's staff and faculty might increase based on its growth in research and labs. Something else to consider.

Interesting topic either way.

Patrick Liska · Answer

@Bradley Gaulden,@Tyler Bradfield, i own a couple of student rentals in PA, the college is not a big college like A&M by any means, but is 1/2 hr away from Penn State. The college is a state school and has gone under some expansion and renovations. some of the expansion was for student housing but i had found a report that was done before the work was to begin, from the college, and in that report it stated that even with the expanded student housing there will still be a big shortage of housing and that they will rely on student rentals outside the campus. 2 years after the housing has been built, there is a slight decline in students ( and i think a lot didn't like the new housing) the college turned around and now enforced that all freshman and sophomores must live in the student housing . this takes away from the amount that normally rents houses. so @Jason V.its a good idea to keep on top of changes at the college, and i even keep track of what they charge to live there to make sure i do not over price my housing, while watching other rentals in the area for pricing too.

Bradley Gaulden · Answer

@Tyler BradfieldI Forgot about all the ancillary departments. I am always surprised at how many there are! plus the new Bio corridor and expansion/consolidation of the HSC their are quite a few drivers. I wish the TCR would have been completed when I was at A&M! that would have been so nice to hope on a train to go back home.

Tyler Bradfield · Answer

I think that when we see a decline in college enrollment, it will have a far greater impact on the smaller satellite campuses and commuter schools, and a substantial, but less serious impact on the major flagship universities. The Texas A&M's, Ohio State's, UT's, OU's of the world will do continue to do well, while the UTSA's, UNT's, and Florida Atlantic's of the world will struggle.

Hattie Dizmond · Answer

I think you will see a "burst" around liberal arts centered schools.  It's unlikely schools like A&M, with their top flight engineering programs and billion $ endowments for research are likely to see much of a decline.  The folks that are leaving school with massive student debt, a degree and an unemployment check tend to be in non-technical fields, at least that's what I'm seeing.  When I first entered the workforce, companies like EDS and IBM required you to have a degree.  They didn't care what the degree was in.  I worked with several developers who had English and History degrees.  The companies didn't care.  They just wanted the degree.  Now, those roles don't require degrees.  People with an Art History degree have no leg up on John who simply has skills.  What they do have that John doesn't is $125k in student loans.  Just sayin.  Bottom line, it's my opinion that some areas dependent upon schools with large liberal arts programs are increasingly likely to experience a decline in rental demand as enrollment in those programs decreases.  Just my opinion.

Jason V. · Answer

@Bradley Gaulden 25,000 students in just Engineering? Holy moly....that's a lot of engineers. I went to a school with 30,000+ undergraduates (at the time) and there were only 150ish Mechanical Engineers in each year of the program at the time - and we were a top 10 ME school at the time. Don't get me wrong, I think if more college students were in majors like Engineering, Math, etc. that the bubble wouldn't be as much of a bubble, because those degrees have marketable value. Just the thought of a school with 25,000 engineering students is wild.

@Chad Benedict It's interesting to get the perspective of someone who lived it. I think the value of valuable degrees continues to increase, but there are also just as many students graduating with extremely expensive degrees with very low prospects for a job, let alone a good paying one. Meanwhile I work with a lot of tradesmen who do a 2 year paid apprenticeship and make more money in years 3, 4 and beyond than many folks I know who have six figure student loan debt. I think it's all moot because the important thing is for people to find their purpose in life, not just a job. But the way they seem to push every single kid in high school to college now, even when they have no need or desire for a college education, just strikes me as a very bad policy.

I didn't mean to knock any particular type of investment, I just wanted to see what the folks who do a lot of investing in college areas thought about the situation.

Brian Lacey · Answer

There is a bubble, quite the bubble to be honest.

I wouldn't worry about it too much unless it was a true college town, where this town primarily exists simply because of the university serving as its largest employer, and bringing in several thousands of students. Really comes down to diversification in an economy. No different in oil towns, or countries for that matter (looking at you Venezuela).

To correct the bubble it's fairly simple. Either costs remain high, and population declines (doubtful), or costs decrease (likely), and population remains. The cuts will be toward expendable admin (talk about useless) and gaudy facilities (refer to first parentheses).

Tyler Bradfield · Answer

The economy in College Station is actually doing quite well, and its not all student driven. Housing inventory in January was at 2.9 months, which points to a constrained supply. While Texas A&M is far and away the largest employer in the area, remember that that includes all the ancillary functions of TAMUS as well, including Agrilife and Engineering Extension agencies. Hospitality, retirement, and health care are all growing sectors that have me bullish on BCS for the foreseeable future. If oil rebounds, and the Texas Central Railway is built, I'd expect massive growth over the next ten years.

Bradley Gaulden · Answer

@Marc MurchisonWe have bounds and bounds of land to expand! :) lol so It is certainly far from done growing. I agree that the crazy boom in CS down off of William D Fitch and other areas is something to consider for being overbuilt. those homes aren't geared towards student rentals and I just don't see current economic drivers allowing for non-students to absorb the inventory. Although, it is giving non-students options to move to areas away from students allowing for investors to come in and create "student neighborhoods". I feel like the whole area behind Northgate between College Main and Welbourn is majority students in those older homes. as the University grows more jobs and services are brought in and provide jobs for people. Its certainly a different market from Dallas and SMU or Houston and Rice.

Marc Murchison · Answer

Jason, I think that the scenario you present is a definite possibility.  I have heard a lot of discussion about college not being the only option and having more people go into the "trades".   I'm just not sure that enrollment in universities will decline significantly due to this.

Bradley,  Nice to see someone else int he B/CS area.  I agree that Texas A&M is far from done expanding but I feel like there has been such an increase in housing that we are close to an "overbuilt" stage in the housing cycle. Thoughts?

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