The New Bubble

Eugene’s student housing boom could spell oversupply

The walls are rising all over Eugene, from Courtside and Skybox apartments (built in 2011) to the 13th and Olive Capstone complex under construction to the towering future Core Campus development at East Broadway and Ferry. Another big student housing project is being proposed for the Laurel Hill Valley neighborhood. Now real estate and development experts are wondering: Is Eugene’s student housing market a bubble destined to pop?

Eugene’s student housing development market mirrored the nation’s during the recession: Even as other investments tanked, high-end, private student housing penciled out. It didn’t hurt that before the recession, Eugene’s student housing market was squeezed nearly to capacity. Big firms based in places like Georgia and Texas thrived and grew, collecting rents previously sent to local landlords. Nationwide, student housing developments were called “recession-proof” — but if local supply surpasses demand and leads to a bursting bubble, more than just student housing will be in trouble.

Bubble? What bubble?

In the past decade, the multi-family housing market in Eugene has been tight. Multifamily NW, an association representing property managers and vendors based in Portland, evaluates the different Oregon multi-family housing (more than four units) vacancy rates twice a year, and MNW Executive Director Deborah Imse says the driver of Eugene’s low vacancy rate in the past was a lack of student housing. But, she says, “Obviously that’s changing.”

The fall 2013 report on Eugene and Springfield found a 3.35 percent vacancy rate for multi-family housing overall — it doesn’t differentiate between housing geared for students and housing meant for other Eugeneans. Multi-family vacancy rates tend to hover between 3 and 5 percent nationwide, and Portland is one of the U.S.’s tightest rental markets with a 3.55 percent multi-family vacancy rate.

Property Management Concepts President Terry Shockley, whose company manages about 3,500 student-focused bedrooms in the campus area, reports that while his student-focused housing used to hover around a 0.5 percent vacancy rate, Eugene is in the short term probably heading toward a new normal like the East Coast, somewhere between 3 and 5 percent.

Shockley noticed during the fall of 2012 that having one or two vacant units out of 10 or 12 isn’t something campus landlords were used to. “They were puzzled why that was happening,” he says, but it mostly comes down to supply and demand. “As more new product comes, people tend to gravitate toward newer product, so it makes it more difficult to keep an audience for your older things.”

The shortage of student housing is fading fast, according to real estate appraisal firm Duncan and Brown’s Corey Dingman, who tracks student-focused housing in Eugene down to the bedroom. “We’ve got a whole load of it right now,” he says, “and there’s a bunch more on the way, too.”

According to Dingman, new student housing construction isn’t simply a reaction to pent-up demand — demand that’s now increasing at a snail’s pace while the supply booms. UO’s student body growth has slowed substantially, from a 1,318-student increase in 2009-10 to a 412-student increase estimated for fall 2013. In 2015-16, the Oregon University System projects UO enrollment will grow by only 28 students, yet one complex, now in the planning phase in the Laurel Hill Valley neighborhood, would open that fall with 606 bedrooms.

For a projected (and partially completed) enrollment growth of about 5,000 students, Dingman has watched the construction of or seen plans for about 10,000 new student-housing targeted bedrooms. It’s a national trend for student housing complexes to rent by the bedroom, and it’s an easier way to look at capacity. If they get built, he says, that’s an overbuild.

LCC doesn’t forecast its growth, but after a recession-fueled jump, its enrollment dropped 9 percent in 2012-13, and Director of Institutional Research and Planning Craig Taylor says it’s looking like a 10 to 11 percent drop in 2013-14 — essentially, it’s getting back to its pre-recession norm. Its 2012 annual report says that for now, LCC expects to draw its usual share of students compared to UO.

“The vast majority of our students aren’t coming from other regions to come to school here,” Taylor says, and many of LCC’s students have different housing wants than UO students. That’s why LCC’s own housing is limited to Titan Court, a 75-unit apartment complex downtown that was created in part to enhance the school’s program for international students.

“Every year these people find somewhere to live, so is there pent-up demand?” Dingman asks. “There’s probably some; however, at the start of school last year I estimated we had about 300 bedrooms available at the end of September, and we’ll have more than that available this year, and that’s before all these new units are built.”

While he doesn’t track small developments like duplexes or fourplexes, he thinks his numbers account for about 90 percent of the student-geared housing recently built, under construction or in the planning phase.

The drive to thrive

With swanky new student housing competing at high rents and existing complexes reacting to more competition, experts say it’s hard to tell which complexes are going to thrive — or whether there’s a large enough market for the higher-end, student-centered apartments at all.

While Dingman says more of the big complexes being built will have on-site management to curb any noise problems, students are people too, and some are attracted to quiet neighborhoods rather than student-centric, high-traffic areas. In other words, big student housing developments drive some students back into Eugene’s neighborhoods.

There’s also the issue of sticker shock — not everyone can pay (or persuade their parents to pay) upward of $500-$600 for a single bedroom plus shared living area, an issue that also affects whether non-students will choose to live in student-focused housing. “I don’t know that a brand new student housing development is going to be in the price range that’s going to make it affordable to people that aren’t students,” Imse says.

Still, the experts are in agreement that the math means something is going to change. “When you add this many bedrooms to a market, there’s going to be vacancies somewhere; we just don’t know where this is going to occur yet,” Dingman says. What students choose depends on budget, location and amenities.

Jay Denton is vice president of research at Axiometrics, an Austin-based firm that tracks national trends in student housing, and he says that true to the adage, location is always important. “People look at it as: Is it pedestrian or not?” he says. “Can you either walk or perhaps bike to campus very easily?” Students like housing that’s a quarter mile from campus or closer; a half-mile is also acceptable, especially with fast, regular public transportation like Eugene’s bus rapid transit (EmX). “Once you get more than half a mile out,” he says, “that starts to change things.”

Denton, Dingman and Shockley all note that private bathrooms for each bedroom are an in-demand student-housing trend, as are social areas like pools or workout spaces.

Shockley says that whatever amenities students say are important, those factors are all circumvented by the influence of a student’s social network. “You’ll see, sometimes people will give you a list of two or three things that they’re looking for, and yet they’ll rent something completely different because it happens to be next to their friends,” he says.

If a bubble bursts

College students are a part of Eugene, and so is their rental market. But don’t expect an increase in student beds to translate to drastically lower rents. Amenities that college students want aren’t necessarily the ones that Eugene renters are demanding, and then there’s the problem of all the four-bedroom units that many families and single people don’t want or need being added to the market.

“I think the demand for four-bedroom units is pretty limited,” Dingman says. “You could probably rent some to non-students, but it’s primarily a student product.” According to his estimates, smaller infill-type apartments near campus are averaging between 2.5 and three bedrooms a unit, but most big new developments, such as Capstone and Core Campus, are averaging above three bedrooms.

Dingman predicts that the real student-housing-based change is going to be in the tenant mix throughout Eugene, with fewer students in typical multi-family apartment complexes and more students in the area surrounding campus. He says that a greater supply usually results in higher tenant turnover, with people moving to available housing that suits their taste or lifestyle better.

That’s bad news for smaller landlords. “These aren’t necessarily wealthy people,” says Eben Fodor, a Eugene-based community and land-use planning consultant and author. He says many of Eugene’s landlords are middle-class people who invested in a rental property, or other landlords counting on renters to cover expenses in retirement, and they don’t have the financial cushion to pay a mortgage, taxes and upkeep during longer vacancies. “Frequently rents are within $100 or so of covering costs per month,” he says.

And, Fodor says, not all compact growth is good. Excessive localized density could cause overcrowded roads and other public infrastructure issues.

Fodor doesn’t see a clear winner if the student housing bubble bursts. “Renters could be the winners,” he says, “but it’s hard to say that that’s necessarily a winning proposition.” With a drastic oversupply in one type of housing comes vacancies somewhere, and that can make rental properties something owners don’t want to invest in, so rentals get shabby or sit vacant on the market for long periods of time. “That ends up affecting the real estate market and puts downward pressure on housing prices,” he says. “That affects everyone in Eugene who owns property.”

The bottom line for renters is something Dingman doesn’t think will change — with the rare exception of very overpriced outliers. “We’ve all seen the four-bedroom house renting for $2,500,” he says. “That may not be achievable in the future.”

For the rest of Eugene’s tenants, Dingman says things won’t change too much. “I think that the last thing anyone’s going to do is drop face rents,” he says. Instead, he expects to see more incentives like shorter lease terms or a month free with a 12-month lease.

If an overbuild occurs, which Dingman and Fodor think is looming, if not already present, and growth continues, there’s no leading indicator to stop projects before they start. Fodor says it can take months for vacancy rates to indicate a problem, and by then more development projects are in the works.

Denton from Axiometrics has simple advice for builders. “Know what else is being planned out there,” he says. “Make sure you know anyone else who’s building near you and how many other beds those properties have.”

And if a bubble bursts, renters, homeowners, small-scale landlords and the big out-of-state companies should all prepare to get wet.

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