Is Student Housing Still Recession Proof?
Among the real estate property types, Off-Campus (or Privately Owned) student housing properties are thought of as a recession proof investment. The main reason is because the core driver of student housing, enrollment growth, shows a high inverse relationship with job growth. During economic down-turns, unemployed workers join higher education institutions to sharpen or gain additional knowledge and skills. Also, during economic growth periods people tend to join the labor force rather than universities. Since the nature of this pandemic driven recession is different from previous ones, will the historical relationship hold and keep student housing a recession proof investment?
Note: For forecast job and enrollment growth, contact www.ThinkWhy.com
Summary Explanation about the Chart
· The chart above shows enrollment and job growth trends from 1990-2019. We can clearly see the inverse relationship between the two variables on the chart. The correlation between the two stands at over -75% from 1990 to 2019, but the recent history from 1995 to 2019 shows correlation statistics of over -86%. Though correlation does not always mean causation, in this case the relationship is causal.
· Since the Great Recession, besides job growth, cost of attending has also played a major role on declining enrollment growth. For many students coming out of high school, joining the labor market to get on the job training or attending vocational schools at a lot cheaper price than traditional schools made sense.
· Pandemic Impact: The pandemic is forecast to break the historical relationship between enrollment and job growth. This year (2020) we expect to see a simultaneous steep decline in both job and enrollment growth. The U.S. economy shut down starting March 2020 and most university classes went online as the number of COVID-19 cases started to increase.
Ø The job recovery has started. However, until stability surrounding COVID-19 becomes realistic, expect a slow job recovery. Current prediction for the availability of vaccine is by the end of the first quarter of 2021, in between expect many ups and downs in jobs recovery .
Ø Many universities have announced shorter Fall 2020 semester, offering ground classes but increasing number of online classes. We expect many students to take the online option or take a pause this Fall 2020 semester since COVID-19 cases are still climbing and a vaccine is not expected to be available when the semester starts. Furthermore, close to a million foreign students attend U.S. universities each year, of which about 300 thousand are new students. Between those students taking a pause and less foreign students attending, expect a sharp drop in enrollment during Fall 2020.
· The data table above shows On and Off Campus housing expenses (room and board plus other expenses) as reported by IPEDs for the school years 2010-2011 and 2018-2019, capturing recovery years since Great Recession. Here, On-Campus housing are university owned vs. Off-Campus housing are privately owned student housing.
· Since the Great Recession, On-Campus housing cost in all institutions increased by close to 24% compared to only about 6% in Off-Campus housing. Private For-Profit institutions dragged down the Off-Campus housing growth as Public State and Private Non-Profit institution’s housing cost growth averaged about 16% from 2010 to 2019.
· During 2018-2019, nominal cost of both On and Off Campus housing are similar as the On-Campus housing cost closed the gap of over $1,500 seen during 2010-2011. Increase in new supply negatively impacted many Off-Campus student housing properties to keep pushing rents higher.
· Pandemic Impact: Since March 2020, most students living in the On and Off Campus student housing vacated, moving with their parents through now.
Ø On-Campus housing did the right thing, as most universities returned room and board costs to students.
Ø However, Off-Campus student housing started to strictly reinforce their lease contracts to continue to collect rents. Per our research, since March 2020 to (if and when) Fall 2020 semester starts, average students (and families) would already pay over seven thousand dollars for a vacant units as students are currently living with their parents yet still paying rents in fear of breaking the lease.
Ø Lease contracts are important to follow through but we are in a completely unique circumstances, where sub-leases are virtually impossible to pass on and unemployment is through the roof.
Ø Owners and operators of Off-Campus student housing should give considerations to student renters during this unique situation. After all, owners and operators are also getting some relief from the federal government.
Ø In some universities, there are petitions being passed around by students and parents for rent relief and/or lease renegotiation but we don’t think the owners and operators will even consider. If direct negotiation with the owners and operators don’t work, there are ways around it, per our research, and communications with those who have successfully mitigated this unique situation. Look for our blogs on this and many other subjects next week.
· Outlook: On and Off campus rent outlook is expected to differ.
Ø Expect On-Campus housing cost to increase by about 2.5% during the Fall 2020 semester, similar to historical average. There are very few outside factors that impact On-Campus housing cost, in that, the biggest driving factor for housing cost seems to be self-imposed rules by the university.
Ø Off-Campus rent growth for Fall 2020 is bit harder to forecast as most have already signed a lease before the pandemic. However, for those already signed leases, high uncertainty remain, in that, if the COVID-19 cases keep increasing at today’s pace, expect most students to take online classes and break the lease.
Ø Before the pandemic, we were forecasting close to 3% rent growth for the Off-Campus student housing during the Fall 2020 semester, however, the revised forecast shows little over 4% drop in rent. Our forecast is based on enrollment growth, available supply, On-Campus rent as a substitution effect and a KC CRE’s unique variable. Like most forecast during the pandemic, due to high uncertainty, the error band remains high. If the stability surrounding COVID-19 cases does not improve by start of the Fall semester, expect a deeper downside risk. We expect very little upside to our forecast since there is less than two months left to the start of Fall semester and there is no material improvement on the COVID-19 cases so far.
Conclusion: During Fall 2020 and Spring 2021 semesters, historical relationship between enrollment and job growth is expect to break, which is also expected to impact the student housing market. Longer term, there may be re-emergence of positive view about the university degrees as most economists are forecasting workers with higher education or “White Collar” jobs to fair better during the times like this (Pandemic) than “Blue Collar” workers.