Daniel Hogan and Joseph Mandeville
RED CAPITAL GROUP
Prospective investors should not proceed on blind faith that college enrollment will inexorably rise.
Housing for college students is the most talked-about niche in the multifamily space these days and may represent an attractive core-plus investment opportunity. The underlying investment proposition is straightforward. The number of full-time college students has grown steadily during the past 15 years and enrollment is widely expected to continue to rise at a robust pace through 2017 or longer. Increasing enrollment will be driven by two principal factors: demographics — the number of Americans between the ages of 18 and 24 grew at a rapid pace during the past decade and many believe the trend will continue — and the widespread impression that a 4-year degree is an essential credential for success in today’s highly competitive job market.
The marginal increase in the student body will be housed largely in off-campus residences provided by private, for-profit entities as few colleges and universities have the financial resources to develop new on-campus residence halls, preferring to allocate scarce capital improvement funds to classroom and research purposes. By the same token, many students, especially upperclassmen and graduate students prefer off-campus housing alternatives as traditional dormitories cannot meet their expectations for personal space, privacy, digital connectivity and overall value.
While these premises are widely accepted in the market, investors would be well advised to make a closer examination of the facts before committing to a student housing project. Conventional wisdom often is a poor substitute for diligent investigation.
The demographic outlook is the threshold matter to consider. It is commonly held that Generation Y (Gen Y) — the progeny of the large Baby Boom generation born between 1977 and 1994 — will swell the size of the apartment-renting cohort of 20- to 34-year-olds and the traditional college student population of 18- to 24-year-olds for years to come. Unfortunately, reality is more ambiguous.
Indeed, the Gen Y story is growing shopworn and its shelf life is rapidly approaching its end. According to constant immigration level projections published by the Census Bureau, the Gen Y growth wave crested in 2008. In 2011, the cohort will expand by 70 percent fewer individuals than it did in that year, and by 2016 the 18- to 34-year-old cohort will begin to decline in number and will not return to its 2015 level before 2025.
A similar pattern is discernible in the college-age population. The cohort of greatest relevance, individuals aged 18 to 24 years, increased in size by a cyclical peak of 395,000 persons in 2009; but the rate of growth is projected to decelerate steadily through 2012 and turn negative by 2013. From 2013 to 2018, the college age population is projected to fall by a net of 1.18 million persons and will not fully recover the loss before 2024. Regarding high school classes, the crop of 18-year olds peaked in 2008 and attrition is projected by the Census Bureau to continue through 2016.
Can increased demand for undergraduate and graduate education compensate for the prospective decline in the 18- to 24-year old population? Recent trends suggest that it may, but the outcome is uncertain.
The most comprehensive college enrollment data comes from the Digest of Educational Statistics published in 2009. According to this source, the percentage of 18- to 19-year-olds enrolled in full-time college programs increased from 35.9 percent of the U.S. same age population in 2000 to 37.7 percent in 2006. Increased participation among older groups was still more significant, as the percentage of 20- and 21-year-olds enrolled in full time programs advanced from 30.1 percent to 35.5 percent. Likewise, 68.6 percent of 18- to 24-year-olds that received a high school degree in the past 12 months were enrolled in a post-secondary program in 2008, up from 63.3 percent in 2000.
Moreover, the uptrend in enrollment appears to have accelerated during the past 2 years. Enrollment at the nation’s 10 largest public institutions, several ranking among the more selective schools in the nation, increased by an average of 2.2 percent in 2009 and 1.5 percent in 2010, considerably faster than the respective 1.3 percent and 0.9 percent respective increases among ranks of 18- to 24-year-old American residents.
But potential student housing developers should interpret these data with caution. Recent gains may not necessarily foreshadow future trends. As Exhibit 1 illustrates, college enrollment growth typically accelerates when jobs for young adults are difficult to find and slows during periods of relative prosperity. For example, full-time U.S. enrollment increased at only a 0.4 percent annual compound rate from 1995 to 2000, a period of relatively strong job creation; but with the onset of the recession, the number of full-time students surged by 2.1 percent in 2001 and 2.7 percent in 2002. When the job market improved during 2004 and 2005, the rate of full-time attendance growth slowed to 0.5 percent and 0.4 percent, respectively, roughly equivalent to the rate of growth in the college-age population.
Again, as the economy soured during the second half of the decade, the rate of enrollment growth soared. In 2007 and 2008, the Great Recession caused cohort employment levels to plunge and contributed in no small part to the rapid rise in college enrollment observed in recent years.
When job opportunities for young workers improve, demand for bachelor’s degrees — an increasingly expensive and less valuable credential — is likely to diminish to some degree. Reduced demand is likely to hit hardest those institutions that exhibited the fastest growth in recent years: less selective institutions offering degrees that are not highly valued in the marketplace.
On balance, the student housing marketplace will continue to be a source of interesting investment opportunities for rental apartment developers. Today’s students and their parents seek better living space and stronger value than typically is found in on-campus housing. Developers that can deliver both are likely to prosper, particularly in locations near the most selective schools. But prospective investors should not go on blind faith that college enrollment will inexorably rise: the strongest drivers of demand are losing potency and the potential for enrollment declines, especially in less selective institutions, cannot be dismissed.
— Daniel Hogan is a director and Joseph Mandeville is a vice president
with RED CAPITAL GROUP