As personal finances tighten and parents still paying back their own student loans prepare to send their children to college, affordability will be more of a factor in selecting a university than before. Couple that economic reality with a flurry of college consolidations and mergers, and eyes begin to turn to flagship state schools, preferably ones with lower in-state tuition and a decent tailgate scene, said panelists at the National Multifamily Housing Council’s 2023 NMHC Student Housing Conference in Las Vegas.
Debt and affordability
Tom Errath, managing director & head of research at Harrison Street, said he remains “very bullish on student housing,” though he noted that consumer trends are causing some concern. “What’s starting to happen is the consumer is seeing some reduced spending power,” he said.
One stark example, Errath noted, is that for the first time in years, most American consumers did not pay off their fourth-quarter 2022 credit cards in the first quarter of 2023, something that had previously been standard. The rate of new credit card delinquency hit 7.2 percent in the second quarter of this year, the highest since before the COVID-19 pandemic.
The resumption of federal student loan repayments has added to sector concerns over consumers’ financial flexibility. However, student loan debt is not something that impacts college students until they leave the institution, and few college students think they will be the ones unable to repay their debt. “We get the student loan question almost from every investor and the typical answer is, ‘Well, the kids going to school—and, certainly, they’re worried about the price—they don’t go in thinking they’re not going to pay their student loans.’”
There is another concern about how student debt impacts family finances, however, as we see the new phenomenon of multi-generational student debt within families: Some parents have not yet finished paying back the cost of their own education. As people tighten their finances, the focus will increasingly be on universities that represent value-for-money, said moderator Madison Meier, senior vice president & head of capital markets at Cardinal Group Cos. “Investing in markets where students are going to be able to have in-state tuition” is something that will become a major focus, Meier observed.
Demographic destiny
The decline in domestic population growth in the early years of the new millennium is another consideration for student housing. “There are going to be fewer 18-year-olds going forward,” said Errath, though these numbers are somewhat offset by immigration.
“Canada has a different immigration policy,” noted Jeffrey Adler, vice president at Yardi Matrix. “They’ve been very aggressive in encouraging international students to come to Canada and attend their schools.”
Meanwhile, the U.S. higher education landscape will continue to adapt to a smaller population, albeit one where university attendance has become increasingly common over the past several decades. The country remains “over-schooled” said Errath, with some 4,000 universities. In recent years, closures or consolidations of small colleges have been common.
“There are so many schools that have taken a thousand kids a year for the last couple of years and I think they’ll continue to consolidate,” said Adler. “We are seeing consolidation among some of the weaker, smaller liberal arts schools.”
Proximity to campus
Meanwhile, the pace of absorption is slowing, Carl Whitaker, director of research & analysis at RealPage, observed. “The mentality has always been ‘If you build it, they will come’,” said Meier, asking the panelists whether they anticipate that that truism no longer holds true.
“I don’t know that I necessarily anticipate that underlying thesis to change, but what I do think will change—and already is changing, for that matter—is that your shadow-market occupancy has already fallen from where it was at the same time last year,” said Whitaker. One major factor is the shadow-market availability of nearby residential space that is relatively close to a campus but not considered student housing.
“Shadow-market occupancy—call it student-competitive, conventional assets, nearby campus—in a lot of universities was more than 98 percent, so many students didn’t have any alternative to rent from in these markets,” said Whitaker. This has driven additional demand into the student sector. However, he added, those occupancy numbers have now begun to fall.
Student housing properties located farther from campus are “far more volatile,” said Adler. “For schools that have exceptionally strong enrollments, the further out tend to be overflow capacity.”
Distressed assets in the sector are more likely to come from less sophisticated, smaller-scale operators located far from campus, especially if the properties are older, said Whitaker. “There is opportunity there, but it’s going to be a little bit tougher to fit your existing strategy.”
Ultimately, “it’s really about how much volatility you’re willing to accept,” said Adler.
Football and flagships
Asked which markets have the soundest preleasing and most favorable rent-growth trajectories, Whitaker offered the University of Tennessee, Knoxville, as a model. Specifically, he cited the high, strong enrollment at the school, the “incredible rent growth” and “really high-quality campus-adjacent” properties. “Turns out most students don’t want to walk more than one mile up significant hills,” which are common in the eastern Tennessee city.
Adler agreed that the strong enrollment numbers at the University of Tennessee bode well for the market and compared them favorably to similar metrics at the University of Kentucky, located in Lexington. The “brand-name appeal” of these well-known institutions are often a boon, noted Errath. “It’s that strong state flagship university, it’s the school you’re going to see on Saturdays playing football.”
“I’m joking (about that being) a strong investment thesis,” said Errath, “but there’s fire where there’s smoke, so to speak, in that a lot of those big state flagship schools are seeing all that airtime come with a lot of additional prestige—students wanting to enroll there, investors looking at it, especially overseas investors.”
Asked by Meier to name their favorite off-radar markets, the panelists had flagship state schools and college football towns in mind. Whitaker named Arizona as an off-radar market to watch, while Errath mentioned the University of Wisconsin-Madison, also acknowledging that he has sent three children to the school on the isthmus. Adler, meanwhile, named Ohio State University and Rutgers University, citing the latter’s “good fundamentals for growth.” Meier offered up Montana State University.
