All Commentary
Wednesday, March 6, 2013

The Dorm Boom: Higher Education’s Fellow Traveler


As universities are reportedly suffering from less revenue from state governments, anyone driving through a college campus is likely to be interrupted by construction traffic. Where I live, much of the campus of the local university has been under construction since I moved here in 2008—when Wall Street was crashing.
Hundreds of millions of dollars are being spent on new facilities nationwide, from dorms to basketball arenas. And yet funding from the State continues to fall. 

Creative Destruction amid the Construction

It’s a curious time for a campus construction boom. Alternatives to a traditional college education are growing every day. Millions are signing up to take courses known as MOOCs (massive open online courses). The New York Times reports that dozens of public universities plan to offer free online courses for credit to anyone worldwide with an Internet connection.
The education model that was once strictly for polymaths is becoming mainstream. Even big universities such as Arizona State, the University of Cincinnati, and the University of Arkansas are participating in a new program called MOOC2Degree. “We’re taking the MOOC idea, but now it will be part of a degree program, not a novelty,” said Randy Best, the chairman of Academic Partnerships, a company that helps public universities move their courses online.  
The Times points out that colleges hope the new online program will attract thousands of students to provide a “new revenue stream [that] could be a lifeline for public universities hit hard by declining financial support from states.”  

The Dorm Boom

Amid the change and uncertainty, real estate developers are rushing to build student housing. Major homebuilding companies like Lennar and Toll Brothers that ramped their businesses up in the single-family housing boom have now shifted their focus to another boom: student housing.   
Ironically, these builders see student housing as a port in the storm to smooth out the ups and downs of the housing business. The Wall Street Journal’s Dawn Wotapka explains their rationale. 
“During the real estate crash,” writes Wotapka, “as prices of single-family homes declined and apartment landlords reduced rent, many student-housing landlords continued to raise rent, thanks to the generosity of parents and student-loan programs.” 
For instance, Kayne Anderson Real Estate Advisors, a private equity investor with 15,000 beds, earned more than 20 percent annually from 2007 to 2012, despite the downturn.  
As evidence of how hot this market is, in 2012, $3.7 billion worth of student housing projects traded hands, a near-doubling from the prior year. Landmark Properties, a longtime owner of this type of product, owns units totaling 5,000 beds, but is looking to expand its portfolio by over 50 percent, with another 2,700 under construction. 
Landmark’s president, J. Wesley Rogers, told The Wall Street Journal, “A lot of people think our space is hot. You see a lot of new players circling the space right now.”  
Developers believe parents will continue to send their kids away to university—no matter that tuition costs have increased 440 percent in the last 25 years, more than four times the rate of inflation.   


Each year from now until 2022, three million students will graduate from high school and will be looking to head off to college. After all, a college degree is the key to financial success. 
Except it hasn’t been lately. Most college graduates cannot find a job requiring a degree. If they can find employment, it is as bartenders or baristas or the like, a phenomenon referred to as “mal-employment.”
In a research brief titled, “The Employment and Mal-Employment Situation for Recent College Graduates: An Update,” produced by the Center for Labor Markets and Policy at Drexel University, the authors note that between 2007 and 2012, there was a sizable change in the proportion of all young college graduates who worked in jobs requiring a college degree. In 2007, 54.1 percent of 20-to-24-year-olds were employed at jobs requiring a college degree. Five years later, that percentage shrank to 43.9 percent. 
For 25-to-29-year-olds, the proportion of those employed in college-required jobs fell from 63.9 percent in 2007 to 56.7 percent in 2012. According to the researchers at Drexel, a large part of these declines occurred in the last two years, despite a job recovery for the overall workforce.  

Hard Realities

One of these days students and parents will figure out that college is not the bargain it once was. There is not enough gold at the end of the collegiate rainbow to pay off thousands in student loans. 
As with most booms, there is plenty of debt fueling college admissions. The New York Fed reports that student loan debt has nearly tripled since 2004. Repayment isn’t always possible, however; not everyone finishes college. While more than 80 percent of students think they’ll graduate, only half that number actually do.
As it is now, according to TransUnion, “more than half of student loan accounts are in deferred status, where the repayment of the principal and interest of the loan is temporarily delayed. Deferred loans now represent 43.5 percent of all student loan balances.”  


In Austrian business cycle parlance, students and their parents are investing in the higher-order good of a college degree, believing that skills-required, higher-paying jobs await college students after they have spent four to six years honing their skill sets. However, time preferences haven't changed. The demand for consumer goods remains, and that's where the jobs are. 
The boom in government bureaucrats, barristers, and bankers is over. JPMorgan Chase just announced it is getting rid of 19,000 jobs. At the end of last year, banks in the United States had 2.1 million full-time employees. That’s 100,000 less than at the end of 2007. Since the end of the recession, government has shed 580,000 jobs, and James Huffman writes in The Wall Street Journal that law schools are in trouble, with applications down by half since 2004. The reason? Only about 65 percent of 2011 law graduates had law-related employment within nine months of graduation. And even those with work aren’t necessarily set: Starting pay has crashed.
All of these facts would seem to fly in the face of the logic of the student-housing industry, but developers appear undaunted. Reportedly there is a shortage of between 1.5 million and 2.15 million beds. Universities lack the funds to build and are counting on the private sector.
While Freddie Mac, a large purchaser of student housing loans, is a bit cautious after purchasing $1.7 billion in loans last year, the private sector is ready to build. Kayne Anderson’s managing partner Al Rabil isn’t worried about oversupply. “In most all cases, you’re looking at a situation where development is just catching up in creating supply to keep up with demand.”      
Bricks-and-mortar higher education is a bubble searching for a pin. Now it’s not alone. Student housing is going along for the ride.