AMA - Student Housing in Georgia

Ravi in Philadelphia asks

I am a loyal listener to your podcast and greatly appreciate all the content that you provide.

I was given an opportunity to invest in college student housing in Valdosta, Georgia adjacent to the state affiliated University.

Numbers looked reasonably good, but as always I look at these things with a skeptical eye.
My question to you is what are your feelings regarding student housing as an asset class? I do
invest in multifamily apartment buildings but student housing is an area that I have not had much experience with. This particular asset has about 230 units and is mainly for students of that university. My concern is that this asset class may be a bit risky during this time since there has been significant upheaval with regards to the pandemic. Although the parents cosign the leases, this  does not insulate from any risks related to schools being closed and these students not paying.
I would love to hear your opinion on this. As always, I value your input as I feel you are very well balanced and provide a very analytical point of view. Thank you as always for your contributions to the community.

Ravi, thank you for the kind words.

This is a great question. I’ve owned student housing since 2011 and generally speaking I love the asset class. However, in the past three years, my perspective on the long term outlook for student housing has changed. The pandemic and the upheaval of 2020 has merely accelerated a trend that was already underway. The problem with student housing is that it is facing multiple headwinds at the same time.

The first is demographic. The number of university age teens is expected to decline over the next decade. This is based on the number of births in the US. Births peaked in the late 1980’s and have declined ever since. This is the so-called echo-boom generation. Not surprisingly, university enrolment peaked in 2011. This was a combination of the economic downturn that happened in the wake of the 2008 financial crisis and the peak number of births that occurred around 1990. This would lead to peak university enrolment about 20 years later.

Let’s talk about the shift to online education. Even before the pandemic, a number of universities had increased the percentage of classes being offered online. If you look at many of the major universities, they have all increased the online programs. The University of Texas at Arlington, a campus of 52,000 students held 52% of its classes online in 2019. They were well prepared for the dislocation of 2020 when they were forced to increase that percentage to a much higher number.

Generally speaking, we are seeing demand for student housing dropping each year. When supply exceeds demand, you will see prices fall for monthly rent.

Let’s look at your specific case in Valdosta. This is a small campus. It grew from about 5,000 students to over 9,000 students at the peak. From 2011 to 2015, student enrolment fell by 17% and the President of the University reduced the number of lecture staff on contract by 35. According to articles I read, many in the community started to question to long term viability of that specific campus. Remember, Valdosta is one of 26 institutions that make up the University System of the State of Georgia. If there were to be shrinkage of enrolment, it stands to reason that the smaller campuses would be eliminated. There would be an effort to consolidate and focus investment on the larger campuses.

I’ve not done a complete due diligence on the specifics of your deal. But when I look at the overall market for student housing on a national basis, and then more specifically in the Valdosta location, I’m not seeing the market conditions that would screaming for me to invest. I’m seeing considerable risk on the downside and not much potential on the upside.