What Will Happen to Student Housing?
Impacts of the FAFSA debacle and university privatization on student housing
Last week, I had coffee with a friend and colleague who works for a student housing owner. We hadn’t caught up in 7, maybe 8 months. When we last spoke, student housing was outperforming most other asset classes. Totally crushing it. I cheekily said something like, “Is your student housing portfolio still dominating?” They sighed and glumly said, “Not anymore.”
They explained to me how the FAFSA debacle had a much more dramatic effect on certain properties than was being talked about in the media. Across all student housing, at most we’re seeing a 5% decline in pre-leasing by region. The Midwest actually had a slight increase in pre-leasing.
If you are more of a generalist and don’t know the details of the FAFSA issues this year, let me explain.
FAFSA stands for Free Application for Student Aid. It’s a government-sponsored program that makes attending college more affordable and accessible for low-income students. The Office of Federal Student Aid decided to overhaul the application for the 2024-2025 school year… and failed miserably. Applications weren’t available until 3 months late. Not only that, when the FAFSA finally opened up, the new system was riddled with bugs. Students who relied on FAFSA and couldn’t get their application to work had to make a decision: do they take a gap year and work? Or find an occupation that doesn’t require a degree?
If these would-be students do enter a profession, say a trade, that pays quite well with no university degree required AND no debt, why would they go back to school? Many sources say that FAFSA’s mistake will add fuel to the argument that higher education is not worth it anymore.
Further, universities may experience a ripple effect where later students opt not to go to school. How can they trust that FAFSA will work for them, after all? Many of these kids are first-generation and come from families where higher education is not the norm.
To quote InsideHigherEd where journalists interviewed students impacted by FAFSA, one student stated,
“It feels like the system wants first-gen and mixed-status students to feel excluded from higher education.”
What does this mean for real estate owners and managers?
The FAFSA debacle did not impact student housing equally across property classes and universities. Student housing near smaller schools and Class B or C properties were hit the hardest. They provide housing for students who needed financial aid, and they’re seeing the biggest impact on pre-leasing. But again, you’re not seeing this in the averages. On average across all locations and classes, we’re seeing maybe a 3% decrease in pre-leasing. But if you look at housing near small schools or that’s Class B/C, we’re seeing as much as 30%+ declines in pre-leasing.
This one mishap by FAFSA will have a huge impact on certain student housing properties’ valuations, especially if leasing stays down. Owners and managers may have to pivot to mixed by leasing conventional, if they can. It’s doable but difficult to budget and plan for.
According to my friend and colleague, who I think is spot on, these smaller schools that primarily serve students who require financial aid may have to consolidate with larger schools. That said, the major universities will keep student housing alive and well.
For now… because this is only part of the story.
Tech billionaires like Joe Lonsdale and Marc Andreessen have been increasingly vocal about major universities being a cartel. Lonsdale put his money where his mouth is and opened his own private university outside of the “cartel.” (By private here, I mean not reliant on government funds, either for university functions or by students.) Both tech leaders share similar views. Here’s a synopsis of Andreessen’s thoughts from his guest slot on The Dwarkesh Podcast.
“I think the incumbent education system is trying to destroy itself. It and the people running it, and the people funding it are trying to kill it. And they’re doing it every possible way they can. For K-12 they are trying to prioritize the teachers over the students which is the opposite of what any properly run company would do. At the university level, the problems in the modern university have been well covered by other people. They have become a cartel. Stanford now has more administrators than they have students. No company would run that way.
The universities are voluntarily shutting down use of admissions testing. They’re shutting down SAT, ACT, GRE. They’re very deliberately eliminating the intelligence signal which is a big part of the signal employers piggyback on top of. They became intensely politicized. [But] there’s some set of people who are obviously going to keep going to these schools.
And then you just look at cost. A degree from a mainstream university that costs, in ten years, a half-million or a million dollars that has no intelligence signal attached to it anymore. Where most of the classes are fake, where most of the degrees are fake, most of the research is fake, where they are wrapped up in these political obsessions. That’s probably not the future of how employers are going to staff. That’s probably not where people are actually going to learn valuable marketable skills. The last thing they want is to actually teach somebody a marketable skill. Teaching somebody a marketable skill is just so far down in the list of priorities of a university now it’s not even in the top 20.
Lot of it is just they’re a cartel. They operate as a cartel, they run as a cartel, it is a literal cartel. And the cartel is administered through the agencies, the quasi-governmental bodies that determine who gets access to federal student loan funding. And those bodies are staffed by the current university administrators. So it’s a self-governing cartel. It does exactly what cartels do, it’s stagnating and going crazy in spectacular ways.
There’s clearly going to be an educational revolution. Does that happen today or five years or ten years, I don’t know. Does it happen in the form of a new in-person model or internet-based? I don’t know. Is it driven by us or by employers who just get fed-up and they’re like — ‘Screw it. We’re gonna hire people in a totally different way.’ That I don’t know. There’s lots and lots of questions about what’s gonna happen from here. But the system is breaking in fundamental and obvious ways.”
What happens if folks like Andreessen and Lonsdale are right? Even if it’s small at first, say, convincing their successful tech friends’ kids to forgo traditional higher ed in favor of another model. What then?
Short-term, the cartel will get tighter. They will probably deny anything is going on. This is a psychological trait we often see in cults. If you believe strongly that your way is the only way, then you refuse to change and instead hold onto your beliefs even more. Robert Cialdini described an example of this in his book, Influence: The Psychology of Persuasion. Cialdini referenced the Chicago doomsday cult as an example of the power of social proof. The cult predicted that doomsday would occur and had sold all their belongings, ended relationships, and quit jobs in preparation. When the doomsday never happened, instead of recognizing their mistake, one of the members received a “message” that told them they were spared because they had done such an amazing job spreading the word about their cult. The cult members who stayed were then even more fanatical, more convinced in their religiosity. I expect that universities will feel threatened by these changes. Rather than recognize they need to change, most will insist that the world around them has got it all wrong.
Long-term, let’s say the wealthiest have all opted for a newer education model. Maybe not even Lonsdale’s; maybe it’s something that doesn’t exit yet. The middle class will then get to be the elites at the Harvards and Stanfords and Yales of the world. And the lower class gets to run the next tier of universities. The lowest tiers of universities then get… no one?
We’ve seen similar trends in other industries. Take air travel.
Flying used to be restricted to the wealthiest of the wealthy. Remember the 1950s glamour days? Where people wore suits on planes? While my uncle-in-law still insists that’s the only way to travel, he’s in the minority now. That’s because in 1978, the Airline Deregulation Act was passed. This law meant the government stopped providing subsidies for air carriers and lessened government regulations. This opened the doors for innovation. Airlines had to compete on price to land passengers. Flying became more focused on the fundamentals, and it became cheaper as a result. At the same time, the wealthy moved to private jets or helicopters. As technology advanced, the upper middle class was also able to afford a smaller share of these luxuries, such as with Uber-for-helicopters with Blade.
We’ve seen a ton of consolidation in airlines.
I suspect that what happened in air travel is a foreshadowing for higher ed.
Owners and managers of student housing, do you agree?
Jen’s Reading Corner
I’m writing this newsletter from a plane. Packed away in my suitcase is my next read: Generations: The History of America’s Future, 1584 to 2069. The author will demonstrate how understanding trends in human behavior via generations can help predict our country’s future. This book came highly recommended by one of my colleagues, and I can’t wait to read it.
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