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Columnist sees unproven opportunity in student housing

Despite reports that too many kids are going to college and the student debt bubble is expected to eventually burst, David Lynn, a contributing columnist for the National Real Estate Investor, says there are still opportunities for investors in the student housing segment.

In the article, he says the echo boomers, some of whom may still be in college, are more likely to pursue higher education.

At the same time, he argues states are experiencing severe budget cuts due to a loss of state tax revenue, sparking worries that falling appropriations will force universities to cut back on their capital spending. Another growing concern is campuses dealing with aging housing facilities and school-owned housing units can only support 30% of today’s enrolled student population, according to Lynn’s article.

With this in mind, Lynn says there’s an increase in public and private partnership opportunities in developing and managing student housing.

“Both cap rates and asset pricing have seen strong improvement in the last two years,” he wrote. “Furthermore, financing for student housing remains attractive, especially from the government-sponsored lenders Fannie Mae and Freddie Mac. Yields are generally 75 basis points to 100 basis points higher than those of comparable conventional apartments and student housing investment can provide for unlevered core return opportunities in the 7% to 9% range. Opportunities exist for all investment strategies: core, value-add and development,” he added.

While there is some risk coming from shorter leasing cycles, high turnover, and more intensive housing management requirements, Lynn is confident investors have opportunities in this area.

But Lynn may be missing a larger point: The real estate bubble is now giving way to a student debt bubble. In an era where our domestic economy is no longer hiring college graduates at record levels, but still requiring degrees, more students in the future may opt for the cheapest possible college experience.

There’s also a growing sentiment that while more than 60% of graduates enroll in college, many are not able to obtain jobs or steady incomes that justify their debt after graduating. And many our soul searching about its worth even after obtaining jobs. Other reports say college is still a necessity to get a good job, but there’s no telling if the debt bubble will force society and businesses to view college through a new lens.

But if Lynn is right, and students still see college as a necessity, then his numbers may show the potential for new real estate investment opportunities.

The only problem I have stems from the many assumptions built into the report.  Usually the trends that kill super bubbles turn up ten years before the actual economic explosion. The student debt bubble and lack of jobs situation is already well-known to anyone following the college-aged population. In fact, it turned up a decade ago. The housing crisis and economic meltdown only exacerbated its bite.

In the end, all student housing units built will need a new supply of students. And it’s unknown how the next decade of young people will respond to today’s economy. That doesn’t mean they will forgo training and education. More education may go online. More students may commute. Others may choose desired trades, so they don’t become skilled craftsman with BA’s in sociology. In fact, those with trades that equate to steady jobs or small business development are the shining star of today’s economy.

But perhaps, more students will go to college, taxing today’s inventory of student housing. Either way, there are many assumptions being made before we see how the youth of today will react to changing times. They don’t want to pay more, they expect to pay less for less, so how they arrange their lives in the future is a mystery.

As we learned in the past crisis, assumptions are the mothers of all mistakes.

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