The Next Real Estate Doom Loop: Dying College Towns

We know this story, and we know how it repeats across time and geography. Soon, we’ll see it take place in hundreds of college towns throughout the country.

TL;DR Bullet Points

·       Birth rates in the United States between 2008 and 2011 fell 7.2%.

·       Due to this decline, the population of 15 to 19-year-olds will drop by 700,000 between 2023 and 2033.

·       It was initially believed that an average of one college closed every week during the 2023/2024 academic year. An August report from the National Center for Education Statistics found that 73 colleges and universities closed between the 2022/23 to 2023/24 academic years.

·       Starting in 2026, the drop in births will cause college enrollments to fall across the nation

·       These enrollment drops will range from 7.5% in the West Coast to about 15% in places like New York and Louisiana to 19% in the northern Midwest.

·       The number of students enrolling in the California State University (CSU) system has dropped by 6% between 2019 and 2024; which is equal to 28,000 fewer students.

·       In 2019, a Harvard Graduate School of Education lecturer predicted that 25% of colleges would close in the following 20 years.

·       According to Moody’s, the 500 colleges/universities it rates will have to spend between $750 billion and $950 billion on facility maintenance and repairs costs that have been deferred for years.

·       Three months into the Covid pandemic, housing values near some colleges dropped as much as 7%. This is a harbinger of things to come.

·       These permanent enrollment drops will cause college towns/areas across the nation to experience real estate doom loops.

Article:

Wells College’s Spring 2024 semester was its last, marking the end of its 156-year history. This closure will also result in 141 employees, or 8.5% of its population, losing their jobs.[1] More importantly, this closure is not an anomaly, but a harbinger of things to come.

While much has been written about the “urban doom loop,” the looming crisis of the “college town doom loop” has received far less attention. After all, with an average of one college closing every week during the 2023/2024 academic year and the upcoming demographic/enrollment cliff expected to shut down hundreds of colleges, the collapse of college towns across America is a massive concern.

(Of further concern, a report from the National Center for Education Statistics found that 73 colleges and universities closed between the 2022/23 to 2023/24 academic years.)

However, to understand the full impact of the “college town doom loop,” we should first understand its underlying causes.

The Great Recession and The Decline in Baby-Making

Many like to think that the impact of the 2008 Recession is behind us. However, an impact of the Great Recession that would take years to identify and begin to worry about was that this financial crisis contributed to a drop in birth rates.

"The number of births in 2007 — 4,317,119 — was the highest ever recorded in the United States," as Gretchen Livingston and D’Vera Cohn wrote for PEW Research. However, this number declined to 4,251,095 in 2008 and “continued to decline during the first six months of 2009, when they totaled 2,032,000, a dip of 63,000 from provisional data for the same period in 2008."

According to economic scholars Melissa S. Kearney, Phillip B. Levine, and Luke Pardue, between 2008 and 2011 the nation’s "birth rate fell 7.2%." As a result of this birth rate decline, "the number of 15 to 19-year-olds will decrease by 700,000 between 2023 and 2033."

One of the many consequences of birth rates dropping due to the recession is that it created a demographic cliff that will soon start hitting higher education.

And this drop will be brutal.

The Approaching Enrollment Collapse

In 2019, a University of Iowa VP discussed how damaging this demographic cliff will be for Midwestern universities and colleges: "the Midwest will be especially hard-hit, with regional forecasts projecting a 19% drop in the number of students attending national four-year institutions - like UI and Iowa State University - from 2012 to 2029."

That’s right. The Midwest faces a near region-wide 20% drop in college student enrollment.

This not only means 20% fewer students, but it also means 20% fewer customers in a college town. Fewer customers spend money at local stores, rent apartments, and just spend less money entering these communities overall. (Of additional concern, the University of Iowa is not only the largest employer in its city; it is one of the largest employers in its state.)

Worse yet, this enrollment decline is expected to impact institutions nationwide, with some estimates placing this drop as high as 15%. Writing for Vox, Kevin Carey points out that states like Louisiana, Ohio, New York, Michigan, Illinois, and Wisconsin, will have enrollment declines of about 15%.

“Demand for regional four-year universities,” Carey further wrote, “will drop by at least 7.5% across New England, the mid-Atlantic, and Southern states other than Florida and Texas, with smaller declines in the Great Plains.”

The California State University (CSU) system has already seen student enrollment drop by 6% between 2019 and 2024. This drop means that there are 28,000 fewer students in CSU.

Higher education experts are not just worried about enrollment declines, but large numbers of institutions completely shutting down. In a 2019 interview for CBS, Michael Horn shared, “I think 25% of schools will fail in the next two decades."

"They're going to close, they're going to merge, some will declare some form of bankruptcy,” Horn continued. “It's going to be brutal across American higher education."

Considering that many colleges in the Midwest and rural areas are their towns' economic heart, these enrollment drops will gut, if not destroy, many communities.

Exacerbating these concerns is that many significant colleges and universities nationwide are already dealing with massive budget gaps and other financial liabilities.

Preexisting Conditions

The enrollment/demographic cliff has yet to come (again, it is estimated to start in 2025/2026), but institutions nationwide are already dealing with budget debts and long-term liabilities. As Jessica Grose, an opinion writer for The New York Times, recently highlighted, higher education institutions with budget gaps have become relatively common. "The general trend seems to be that the schools facing these shortfalls have declining enrollments, and state and federal funding is not meeting the financial gaps left by fewer students," Grose shared.

Some recent examples include:

·       Pennsylvania State University with a $140 million budget deficit

·       University of Connecticut with a $70 million financial gap

·       DePaul University is projecting a $56 million deficit

·       The University of Arizona is dealing with a $240 million budget gap

The budget gap that probably received the most attention recently was West Virginia University’s $45 million shortfall. WVU’s finances and widespread cuts inspired hundreds of news pieces. However, an aspect of WVU’s financial concerns that few outlets covered was that West Virginia University has $1.01 billion in financial liabilities.

As Mike Tony wrote for the Charleston Gazette-Mail, “WVU’s long-term financial liabilities totaled $1.01 billion as of June 2022,” and “such liabilities typically need to be repaid more than one year into the future.” Even more concerning is that “those liabilities [have] more than doubled from their $492.4 million total in 2010,” Tony detailed.

What makes this amount even more concerning is that it was data the general public could not easily access. Additionally, WVU isn’t the only school with billions in debt. The University of Chicago not only has a $239 million budget deficit, it also has a debt of $5.8 billion.

Yet, the most substantial financial concern for universities is the cost of maintaining facilities. Moody’s, the bond rating organization, rates about 500 colleges/universities in the United States. According to a recent report from Moody’s covered by HigherEdDive’s Ben Unglesbee, “Collectively, the capital needs for facilities amount to between $750 billion and $950 billion over the next decade for colleges.”

(Of note, $950 billion spread across 500 schools is an average of $1.9 billion. Not to be negative, but I don’t think a bake sale will help.)

Let’s take a moment to talk about condos in South Florida. (This may sound unrelated, but I promise it will make sense.) For decades, condo associations and owners in South Florida put off spending money on repairs. These problems didn’t go away. Like most unaddressed problems, they only got worse and more expensive. As a result of people deferring maintenance and repair costs for decades, condo owners are now seeing skyrocketing special assessments and repair expenses. These bills have made these properties increasingly unaffordable for owners and buyers.

Sadly, something similar has happened in higher education. Institutions did not actively fix facility problems as they arose, so now, they have years, if not decades, of repairs that need to be paid for.

What Colleges are Selling, Gen Z’s Not Buying

Compounding these budget concerns is that many university/college systems are already experiencing widespread enrollment drops. For instance, not including New York's four major research universities, enrollment at New York State’s public four-year institutions experienced enrollment drops of 13% from 2011 to 2021. A particularly concerning example of New York state’s problems can be found at Buffalo State University. Alongside BSU announcing cutting 37 programs, the school shared that its enrollment had declined 42% in the last decade.  

Outside of New York, undergraduate enrollment nationwide dropped 8% between 2019 and 2022. As Alan Mallach wrote for US News, "From 2010 to 2020, enrollment at public two-year colleges dropped by 35%, or 2.5 million fewer students." No one quite knows why enrollment numbers for so many universities and colleges are dropping before the enrollment cliff begins, but some research suggests that a portion of Gen Z do not believe that college is worth the cost.

Interestingly, even free college isn’t enough to combat this trend. A study by Elizabeth A. Hawke and David B. Monaghan that was published by Brown University’s Annenberg Institute discovered that does not help recruit new students. As Inside Higher Ed’s Liam Knox wrote, these reports “found that advertising ‘free tuition’ was not enough to get new students to flock to higher education, especially those who may not have pursued college otherwise.”

Though this study was only focused on two last-dollar tuition guarantee programs in Pennsylvania, it hints at more significant concern for colleges. If a growing number of young people no longer believe that colleges are worth their time, there will be very little these institutions can do to stay afloat.

And the lack of faith Gen Z has in higher education is already beginning to harm institutions. From small schools, such as Vermont’s Goddard College and Alabama’s Birmingham-Southern College closing, to the entire Pennsylvania State System of Higher Education (PASSHE) losing about 30k students in a decade (from the 100,567 students in the 2012-13 academic year to 70,597 students in 2022-23), higher ed is bleeding students before the demographic cliff even hits.

Overall, some reasons for these budget woes range from the residual effects of the pandemic to states cutting funding for their institutions to young people (especially young males) becoming less interested in college. Though all schools should strive to address these concerns, it doesn’t change the fact that many colleges and universities are not preparing for the enrollment cliff.

While it is easy to only focus on these institutions as islands unto themselves, it is important to remember that every higher education institution is economically intertwined with its local community. For many communities, colleges are their economic engine. And American history is filled with examples of what happens when communities lose their economic engine.

The Echoes of Dead Company Towns

Many academics consider themselves and their profession distinct and socially more prestigious than other industries. But ultimately, a college town economically mirrors single-industry and company towns.

Economists refer to this phenomenon as shrinking cities. But regardless of what it is labeled, we know what happens to those communities when the primary employer shuts down.

Many of us have driven through these communities and witnessed them decomposing towards becoming a ghost town. A once brightly colored sign welcoming visitors to a city now faded. Rows of homes and buildings are boarded up because they haven’t been used in years. But even more tragic are those who remain. Whether by choice or because they cannot leave, these communities are often populated by people who dream of their town’s former glory at night while slowly being consumed by bitterness because the world has left them behind.

For the less sentimental, allow me to reframe this scenario using language already used to discuss real estate doom loops.

As a college’s enrollment drops and fewer students move to the institution’s area, there will be fewer customers. Also, even a tiny drop in student enrollment will force an institution to lay off faculty and staff. This downturn will almost immediately spread to the community as there will be fewer students and fewer employed people in the area to spend money at local businesses. And as local businesses lose revenue, they will be forced to lay off workers or even close down entirely.

While this happens, decreasing students and resulting college downsizing will wreak havoc on local real estate. Not only will there be fewer students and workers to rent properties, but laid-off people who own homes will have to put these houses on the market so that they can move elsewhere. This means that local communities nationwide will experience real estate markets filled with homes and apartments that nobody wants or can only be occupied at steep discounts. But it doesn’t stop there. Because many of these now-emptied houses, apartments, and businesses will most likely be financially underwritten by a regional bank, regional banks nationwide will be deeply exposed to these local economic downturns.

A Pandemic Preview

Covid gave us a sneak peek of what will happen when colleges close. Published in 2023, an analysis of home values within half a mile of a university or college found that schools ending on-campus classes because of the Covid-19 pandemic “experienced a maximum decrease of 7% after three months of the outbreak.”

So now, what happens to a community when a college or university closes? What happens to a town when faculty, staff, and others directly and indirectly employed by a college lose their jobs?

The Afterlives of Former College Towns

We know this story, and we know how it repeats across time and geography. Soon, we’ll see it take place in hundreds of college towns throughout the country.

I know many academics are already hoping that the data isn’t accurate. That a new population of students will be magically found, that the budgetary concerns will be overblown, or that everything will return to pre-COVID levels. But as Rachel Burns, a senior policy analyst at SHEEO, told The Hechinger Report: “It’s not corruption, it’s not financial misappropriation of funds, it’s just that they can’t rebound enrollment.”

According to The Hechinger Report's Olivia Sanchez: "By 2030, 449 colleges are expected to see a 25% decline in enrollment and 182 colleges are expected to see a 50% decline."

"By 2035, those numbers are expected to rise to 534 colleges expecting a 25% decline and 227 colleges expecting a 50% decline," Sanchez continued, "by 2040, a total of 566 colleges are expected to see a 25% decline and 247 are expected to see a 50% decline."

There have been a few attempts to help communities after their colleges have shut down. For instance, Wisconsin – which as seen several state colleges recently shut down – approved of $20 million to the Wisconsin Economic Development Corporation to help these communities. However, these communities are only eligible for a maximum of $2 million. While $2 million sounds like a lot for a person, it is a fraction of the monetary value colleges brought to their communities when they were financially healthy. In other words, these $2 million grants are band-aids placed over massive wounds.

Without question, colleges and universities have brought immeasurable value to their communities. However, that value was only maintained so long as student enrollment increased or remained steady. And that will no longer be the case for many institutions. It is most likely that leaders across the country will kick this can down the road until there is no more road. However, I hope leaders will instead think of ways to respectfully end their communities before a college town doom loop guts them.

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[1] Wells College was located in Aurora, New York, a village in the town of Ledyard, which has a population of 1654 as of May 2024. And 141 employees out of a population of 1654 is just over 8.5%.