Just How Much Of A Demand Driver Can Student Debt Be For Multifamily?

As the epidemic of American student loan debt continues to grow in scope and severity, its boon to the multifamily industry is up for debate.

The correlation between a recent college graduate's debt burden and their ability to buy a house seems to be strong and intuitive. Being saddled with debt would seem more likely to both discourage a person from taking on the cost of buying a home and make it harder for them to obtain a mortgage. 

That theory is backed up by a CBRE report released this month concluding that student debt is the biggest factor preventing recent college graduates from buying a home, and that growth of that debt will translate to continued heavy demand for multifamily product.

The average debt load for a student loan recipient has risen from below $20K in 2007 to above $35K in 2019, and the amount of total student loan debt across the country has risen past $1.5 trillion, found the CBRE report, which also used data from the U.S. Department of Education. In 2018, 60% of "younger homebuyers" reported that student loan debt had delayed their ability to save up for a down payment on a house, CBRE reported. A 2016 study from the Federal Reserve Board found that every $1K in student loan debt an individual leaves college with translates to a 2.5-month delay in buying a house.

A bigger problem than just debt

Despite a wealth of correlative data, academic research in the past few years has challenged the notion that student loan debt is a primary cause in delaying homeownership for college graduates.

A 2015 study from Dartmouth College professor Jason Houle and University of Wisconsin professor Lawrence Berger found that since the Great Recession, young adults have delayed every major life transition, including moving out of their parents' houses, entering the job market after college, or getting married and having children. Buying a home is just part of that greater demographic shift, they posit.

“If we think about why homeownership is declining across cohorts, young adulthood has a different geography now," Houle told Bisnow. "We found student debt had a pretty negligible effect when compared with other things.”

If there is a financial factor hampering student loan holders' ability to buy a house, it is more likely related to the job market that awaits them after college than the debt they accrued while attending. Unemployment is low, but wage growth was largely nonexistent from before the recession until last year, and workers have less optimism about the quality of available jobs on the market. 

“This level of labor market precarity that has been traditionally associated with the low-wage market is becoming a more standard feature of the segment of the labor market that college graduates occupy,” Houle said.

When it comes to wealth building, the issue of stagnant wages may be more significant than growing student debt, but the two compound each other, said Jeanette Rice, CBRE's head of Americas multifamily research. While the recent gains in wage growth could easily be erased by an economic downturn, the cost of college doesn't have much chance to stop rising.

“We’re still operating under a model established in the 1950s and '60s, when states didn’t have to pay for all sorts of social services they do now," Rice said. "So, it’s not to say that the states don’t value education, but they don’t have the money to fund it like they used to.”

Spending on public universities has decreased for decades on a per capita basis, as well as part of a percentage of state budgets, Rice said. Houle points out that those cutbacks require attendees to pay more for tuition, housing and food, the latter two often being more burdensome for a student taking out loans.

Private colleges and universities are just as fixed in a long-term trajectory of rising costs because of heavy competition for prime students. Schools are now in a near-constant state of expansion, renovation and development in order to add "bells and whistles" for campus visits, Rice said.

How millennials navigate the economy

Despite the rising cost, the heightened cultural consciousness of student debt and its dangers has led to a recent decrease in the percentage of college students who take out loans from a peak of 69% in 2016 to 65% in 2018, the most recent year in the CBRE report's data. Rice told Bisnow that she expects that number to keep climbing, as students and families seek out alternatives to accumulating debt.

Recent college graduates with or without debt continue to flock to job centers like New York, San Francisco, Washington, D.C., and other major cities, Rice said.

What has arisen is a self-reinforcing cycle: young talent flocks to the markets where they know good jobs are, and employers move in to compete for that talent. The effect on homeownership is predictable.

“Most younger people are gravitating towards cities more and more, and those markets just have a dearth of housing in general, which drives prices up,” Houle said. “That effect would likely swamp any student debt effect [because] it’s such a big, structural thing.” 

Finding an apartment near an urban job on an entry-level salary is challenging enough — even if there were homes available at less than astronomical prices, renters are so cost-burdened in the most expensive markets that building wealth to buy one is severely impacted.

While all the above factors hampering or delaying homeownership may sound like good news for multifamily owners, they don't affect all holders of student debt equally. All of those negative effects are subject to demographic factors like familial wealth and race that are ultimately more deterministic, Houle said.

For Class-A multifamily in urban markets, the pool of potential tenants is less likely to be faced with difficult questions about spending or saving money. In urban cores especially, apartments may be filled by empty nesters who rent by choice, rather than young professionals waiting to buy their first home. 

“The multifamily product in this decade has been built and marketed for young professionals, but is priced beyond what young professionals can make," Rice said. "And as they’re filled up with more established professionals or empty nesters, the broader question becomes, how many people can pay for the new construction? In some very competitive locations, they seem to have reached the limit, which is why we see a lot of concessions."

Philadelphia-based developer Post Brothers develops adaptive reuse projects that are often the first Class-A apartments in a given neighborhood, making its portfolio particularly geared toward young professionals. Post Brothers Senior Vice President of Property Management Yvette Stewart estimates that at least 75% of the company's tenants have student loans, but that they tend to leave after one-and-a-half to two years and buy their first house.

“We are the highest price in any market where we are, so typically our residents come from families with already built wealth," Stewart said. “Those that don’t have that family backing typically would lease in a more affordable apartment complex.”

The search for housing that comes with a certain level of amenities and finish without paying urban, Class-A rents has led many millennials to suburban apartments, especially garden-style complexes that can be built more cheaply, Rice said. For those squeezed by debt that still carry aspirations to live in luxury urban housing, the margin for error is slim.

“A considerable percentage of those who do have a lot of student debt are ones that we’ve taken to court for nonpayment,” Stewart said. "Those tenants feel pressure for how to juggle expenses when they want to live in a nice place and they work hard, and even when you have a job, without rich parents, you’re struggling."