If the Higher Education Bubble Bursts, how will Commercial Real Estate be Effected?

When it comes to the state of higher education, the  rumblings of dissatisfaction are hardly new. Some commentators, after the bursting of other past “bubbles”–notably the dot-com and housing varieties–have predicted higher education as the next casualty. Practically speaking though, what does this mean? Let me approach this question by first establishing a baseline understanding of the issues involved. At minimum, it requires an understanding of both the underlying concept of a “bubble”, and how it fits in the context of higher education.

First, consider the characteristics that typically define an asset in a bubble: overvalued, unsustainable (growth or value), and irrational or unrealistic expectations. There still exists the widespread belief that a college education (even graduate-level education) is necessary to achieve future financial success–leading students to take on extreme levels of debt. Arguably, this would be acceptable if starting salaries for recent graduates kept pace with rising tuition and the schools provided more practical skills upon graduation. However, this doesn't seem to be the case; “over the last 25 years, average college tuition and fees have risen by 440 percent–more than four times the rate of inflation and almost twice the rate of medical care.”

As a result, students and their parents are openly questioning the value of the education received. Further, the relatively cheap and available credit, which has been the source of financing the tuition gap, will slowly start to fade. It looks like the traditional academic model is set to change. Although a college degree will likely still retain its value as a signaling or credibility mechanism, graduating high school students will likely turn to cheaper public schools, other nontraditional institutions (such as University of Phoenix) or even decide to explore non-college careers.

Student housing developers and multifamily owners in university-dominated markets take note. If the market begins a process of self-correction, expect some universities to struggle to fill their seats. As online and vocational programs become “increasingly successful at challenging high-priced private colleges and those public universities that charge $25,000 or more per year,” the demand for non-university sponsored housing will diminish accordingly. Equally forceful, however, is the fact that colleges hit hardest by the financial collapse–and thus unable to recover from endowment losses–will be unable to lower tuition. A further hemorrhaging of student enrollment and painful lesson of supply and demand, will follow. Investors must be ready to underwrite in the absence cash-flow enhancement opportunities.