Student Housing Headwinds

The Real Estate Espresso Podcast

Student Housing Headwinds

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Welcome to the real estate espresso podcast. Good morning. I’m your host, Victor Menasce.

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. It’s like gravity; if you try and fool gravity, you’re likely to lose. It’s the same with Supply and Demand.

Today, we’re examining three forms of downward pressure in the student housing sector. I’m making a simplifying assumption that, over the next year or two, the supply of student housing isn’t going to change dramatically. The real issue is on the demand side.

Undergraduate enrollment in the U.S. has seen a general decline in recent years, particularly after the pandemic, while graduate enrollment has fluctuated more. Specifically, undergrad enrollment saw a 15 percent drop between 2010 and 2021, with 42 percent of that decline occurring during the pandemic. However, projections indicate a potential 9 percent increase in undergrad enrollment from 2021 to 2031.

Simultaneously, we’ve seen an increase in enrollment at community colleges, with the most significant growth occurring in public two-year institutions. In contrast, the cost of tuition, fees, room, and board at three types of higher education institutions has been increasing at steady rates; 32 percent at public four-year schools, 26 percent at private nonprofits, and 11 percent at public two-year schools. With the cost of a university education increasing much faster than median family income, the burden of student debt is becoming heavier.

Apart from falling enrollment numbers, the student housing sector also faces the challenge of stricter borrowing rules. Government-sponsored student loans now have stricter borrowing limits, which might result in reducing the demand for student housing, as a portion of these loans are used to fund housing costs. Meanwhile, fewer international students are choosing to study in the U.S., creating another challenging factor for student housing.

Adding to these, some student housing providers had financed their properties at much lower interest rates than today’s rates and will face higher debt service costs when refinancing their debt. Also to remember, vacancies in student housing create more significant losses than in the market or affordable multi-family apartment housing sector. Losses from vacancies in the student housing might lead to falling rental prices and persistent vacancy, and these properties might even disappear from the market entirely.

That’s all for today. Have an awesome rest of your day, make remarkable things happen and talk to you tomorrow.

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