Student Housing Headwinds

If you’ve been listening to this show for a while you will know that I’m a proponent of the law of supply and demand. To me, the law of supply and demand is a little like gravity. If you choose to try and fool gravity, you’re probably going to end up on the losing end of that bargain. It’s the same with supply and demand. 

On today’s show we are looking at three forms of downward pressure being exerted in the student housing arena. I’m going to make the simplifying assumption that over the next year or two, the amount of supply of student housing is not going to change dramatically. The real issue is on the demand side. 

This is a segment that quite frankly has been under pressure from simple demographics. Birth rates are down and the number of students enrolling is down. 

There are a number of new borrowing limits that affect government sponsored student loans in the latest tax legislation that was signed on July 4.

During times of falling domestic demand for a university education, many schools try to make up the shortfall with foreign students. But here too  we are seeing falling numbers of international students coming to the US for university. 

This is another headwind for student housing. Layer on top of these headwinds the fact that some student housing providers had financed their properties at much lower interest rates than today’s market rates. These properties will face substantially higher debt service costs when it comes time to refinance their existing debt. 

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Episode Transcript

(00:02):
Welcome to the Real Estate Espresso podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. If you've been listening to the
show for a while, you'll know that I'm a proponent of the law
of supply and demand. To me, the law of supply and
demand is a little bit like gravity.
You choose to try and fool gravity, you're probably going
to end up in the losing end of that bargain.
It's the same thing with supply and demand.

(00:23):
You know, today's show, we're looking at 3 forms of downward
pressure being exerted in the student housing arena.
I'm going to make the simplifying assumption that over
the next year or two, the amountof supply of student housing is
not going to change dramatically.
The real issues on the demand side.
And that's what we're going to focus on today.
This is a segment that, quite frankly, has been under pressure

(00:44):
from simple demographics. Birth rates are down, and the
number of babies growing up, becoming of high school and then
university age is declining. In recent years, domestic
undergraduate enrollment in the US has seen a general decline,
particularly after the pandemic.Well, graduate enrollment has
seen a bit more fluctuation. Specifically, undergrad
enrollment saw a 15% drop between the fall of 2010 and the

(01:07):
fall of 2021, with 42% of that decline occurring during the
pandemic. But there are some indications
of a potential rebound in undergrad enrollment with a
projected increase of 9% between2021 and 2031.
We saw a very consistent declinefrom 2019 to 2022.
That's in the heart of the pandemic, with a decrease of

(01:28):
over a million students in 2021.Undergraduate enrollment was
15.4 million, three percent lower than in 2020 and 15% lower
than in 2010. We also saw a 5% drop in
freshman enrollment in the fall of 2024 compared with the
previous year. Graduate enrollment increased
slightly from 2019 to 2021 and then fell again in 2022.

(01:50):
In the spring of this year, graduate enrollment increased 1
1/2% compared with the spring of2024, and it's 7.2% higher than
in 2020. So we've seen a bit of a rebound
since the pandemic, but overall,the decline in undergraduate
enrollment is part of a broader trend.
There is a projected enrollment Cliff expected to begin in 2026

(02:11):
due to demographic shifts in thepopulation of high school
graduates now where we've seen adrop in university enrollment,
community colleges have seen a recent increase in undergrad
enrollment with the largest growth occurring in public 2
year institutions. Over the past two decades.
The cost of tuition fees from and board have increased by 32%
at the public four year institutions, 26% of private

(02:33):
nonprofits and 11% of the public2 year schools.
The cost of the tuition fees, room and board at the four year
public colleges has risen 2 1/2 times faster than the median
family income, which has grown 13% during that same 20 year
period. So growth and cost of university
has grown much faster than incomes have risen.
The past few years have seen significant forbearance in

(02:55):
student loans. During the pandemic, there were
attempts by the Biden administration to forgive large
amounts of student debt and the millions of students.
The current administration has taken a much stronger stance on
the repayment of those loans. There's a number of new
borrowing limits that affect government sponsored student
loans in the latest tax legislation that was signed on
July the 4th. Now the law imposes a new series

(03:16):
of borrowing limits. Here's what's going to change on
July 1st, 2020. Sixth, number one graduate loans
are capped at borrowing $100,000for master degrees and $200,000
for professional degrees like law, medicine and dentistry.
Currently, students can borrow up to the full cost of
attendance, minus other aid. Then there are Parent PLUS
loans, which currently let's parents borrow up to the full

(03:38):
cost of an attendance for the child's undergraduate education.
These are capped at 20,000 a year, or a total of $65,000 per
child. Then there's the Graduate PLUS
Loan program, which allow graduate students to borrow up
to the full cost of attendance that's being eliminated
altogether. So in addition to the following
demand for housing, simply basedon demographics, we're seeing
tougher rules for borrowing, which may have the effect of

(04:00):
reducing demand for student housing. 75% of student loans
were for more than just tuition,so some of those loans are
definitely being used to fund housing.
Now, during times of falling domestic demand for university
education, many schools try to make up the shortfall with
foreign students. But here too, we're seeing
falling numbers of internationalstudents coming to the US or
university. That's another headwind for

(04:21):
student housing. Layer on top of these headwinds
the fact that some student housing providers had financed
their properties at much lower interest rates than today's
market rates. These properties will face
substantially higher debt service cost when it comes time
to refinance their existing debt.
Now you have to remember, vacancies in student housing are
different from what you see in the market rate or even the
affordable multi family apartment housing.

(04:43):
If you have a vacant apartment, you can usually rent it within a
month or two. But if you have a vacancy in
student housing, you could have an entire semester vacancy or
perhaps even an entire academic year vacancy.
You put all of this together, it's going to mean falling
rental pricing for student housing.
It's also going to mean some persistent vacancy.
Now, if these units are scattered inventory, they may

(05:05):
end up disappearing from the market and they may join the
long term rental market. They'll disappear entirely from
student housing. But if the units are in a
purpose built student housing building, that vacancy is going
to hurt the performance of thosebuildings.
As you think about that, have anawesome rest of your day.
Go make some great things happenand we'll talk to you again
tomorrow.