As the fall semester kicks into gear with COVID-19 still looming, public officials and school administrators continue to be faced with the difficult decision to either open campuses with safety precautions or bring all lessons online. Opening campus can keep the local economy afloat but runs the risk of a viral outbreak, while bringing classes online demands technology upgrades and drastically reduces revenue for both schools and local businesses. The middle ground is not necessarily enticing, as a hybrid learning model with reduced on-campus occupancy could end up hurting both jobs and student experience. Further, there is no guarantee that added safety precautions will work as planned.
Universities are often the economic hub for the towns they reside in (“college towns”) and surrounding cities, hence the financial ramifications of campus decisions cannot be overstated. Between employment, dining halls and dorms to entertainment spending around campus, no single factor drives college town economies more than the student bodies (pun intended).
Since home prices are driven by wages and population density, investors can leverage job growth and migration data to help predict Home Price Appreciation (HPA). With 20 million college students in the U.S., the open campus vs. remote classes decision is a high-confidence indicator for where home prices will go in the coming year. Here, Unison offers a data-driven approach to help assess college towns’ susceptibility to campus closures, highlighting those expected to be the most resilient and at-risk.
College Town Investment Returns - A Look Back
Over the past decade, the presence of a university in an area did not boost home price appreciation. Using home price data from Zillow (see Appendix) and controlling for all other variables, Unison’s analysis found that:
- Zip codes with university presence slightly underperformed zip codes without them
- College towns with larger populations experience higher price appreciation
- Rental yield (what landlord receives after expenses, divided by property value) are higher in college towns:
a. With higher population
b. Where the college is unranked by the Wall Street Journal or the New York Times
c. With a public university, as opposed to private
In the public market, college town housing has similarly underperformed. Annual total returns (price appreciation + dividends) for American Campus Communities (ACC) — the only publicly-listed student housing Real Estate Investment Trust (REIT) — trailed the MSCI U.S. Residential REIT index 9.5% to 11.4% from 2010 to 2019. Student housing had not been a particularly rewarding investment historically, and ACC’s year-to-date decline of ~20% suggests investors are still pessimistic about the future of student housing investments.
A Formula to Identify Winning College Towns
While online classes and closed campuses paint a bleak picture for college towns, avoiding investments in college towns altogether would be far too superficial. A sensible quantitative approach can help investors infer HPA winners and losers with higher confidence.
The reality is that not all universities can afford to embrace remote learning. Despite “Tuition is rising much faster than inflation!” becoming a cliche, many schools were already in financial trouble before the pandemic. The Financial Fitness Tracker produced by The Hechinger Report shows that enrollment has fallen in roughly half of the 2,662 schools studied, and 30% of all schools brought in less tuition revenue in 2017-2018 than in 2009-2010. Pre-COVID-19, universities were able to make up the tuition decline by offering and profiting from luxurious on-campus amenities from sushi chefs in dining halls to lazy rivers, and increasing dorm prices accordingly. Compared to the public outcry against rising tuition, room and board inflation was rarely protested. Most Resilient College Towns
Many schools are still figuring out where they sit on the fully-remote learning versus business-as-usual spectrum, or how long their current reality will last. We can, however, gauge which schools are most at-risk of shuttering altogether by leveraging NYU Professor Scott Galloway’s research, which categorizes universities into four quadrants (Thrive, Survive, Struggle, Challenged) based on value-to-cost and vulnerability scores. Galloway suggests that more vulnerable schools are those that rely heavily on tuition (as opposed to endowment and sponsorships) and on international students, as well as those providing lower value for tuition costs. Value-to-cost is measured by a combination of alumni lifetime earnings, tuition, student experience score, and school ranking/popularity.
Expect Urban College Towns to Persevere, Rural Ones to Struggle
We see that major cities dominate the resilient college town list. Echoing our findings in the Unison Job Resilience Report published in May, this is owing to populous cities having the economic breadth to absorb shocks.
For example, Boston’s status as an iconic college town may lead one to believe that campus closures would be catastrophic for its economy, but our findings suggest otherwise. In Boston, Baltimore, and Philadelphia, not only can the cities withstand temporary campus closures, the elite universities also have the financial resources to cope with revenue shortfalls. This observation does not diminish the impact of universities on big cities, but rather highlight their cultural influence as opposed to being economic focal points. Conversely, for at-risk college towns, neither the town nor the schools can afford campus closures. At-risk college towns are either reliant on jobs linked to the universities, or lack the population size to sustain a loss of revenue from student customers. For example, Kent State University’s student body (22,000) rivals the population of Kent itself (29,000). Businesses such as restaurants, coffee shops, and apartments will be hard-pressed to survive if half of their customer base vanishes. The reverberation will be felt throughout the town, and a combination of business consolidation, liquidation, and innovation will be needed before the local economies can reach a “new normal”.
Home price appreciation is driven by economic activity (e.g., residents’ ability to pay) and population density (e.g., demand for residential units). Both factors are expected to worsen for college towns on our at-risk list as wages and residency deteriorate. COVID-19 poses a conundrum for communities that rely on university jobs and student patrons, as the optimal solutions for student safety and institutional/business solvency contradict. Regardless of college administrators’ decisions for the fall semester and beyond, the future will likely play out much differently for resilient and at-risk towns.
Looking forward, constrained supply and healthy demand in the form of population and wage growth may play an outsized role in returns. As enrollment in traditional colleges continues to trend downward and more campuses incorporate remote learning into their models, focusing on attractive neighborhoods where student housing can more flexibly be converted to alternative uses could be a more rewarding strategy for investors.
Appendix Historical Performance by Category Informational Purposes only: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this blog post constitutes a solicitation, recommendation, endorsement, or offer by Unison or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.