Old School Real Estate

Looking back, do you wish you had bought property in your alma mater's town?

University communities present an appealing real estate investment opportunity. As is the case with government, higher education institutions rarely shrink in size. The energy of great college towns comes not only from young blood, but also from sporting events, live performances, literary events, bookstores and cafes. They combine academic, cultural, and athletic interests, balancing tradition with new business growth. Often, they mix urban amenities and small-town charm. An examination of the recent performance of college towns versus the rest of the nation demonstrates that localities where higher education is the primary economic driver enjoy significant advantages as an economic safe haven.

Over the last 15 years, on average, unemployment in college towns is an astonishing 40% lower than the national average.

In addition to low unemployment, in good times and bad, college towns have consistently generated jobs. These markets have outpaced the nation in job growth for the last five years, even creating jobs in 2002 and 2003 when the rest of the country was experiencing negative job growth. The Bureau of Labor Statistics changed its methodology for measuring local area employment in 2000, which likely explains the one negative year for college towns (the unemployment rate was only 3.1% for the same period for university communities). Why do college and university towns enjoy better than average employment data?

First, college towns possess a relatively stable income base that is typically independent of the business cycle. Colleges are generally not susceptible to fluctuations in business or consumer confidence. Their financial performance, while important, is not held to the same earnings expectations as a publicly traded corporation. Higher education wage earners are thus shielded from economic swings, enabling faculty and staff to maintain steady income levels even during an economic downturn. In addition, college towns typically have a higher share of non-wage income to total income, including money from student loans, research grants and spending allowances from families.

With a large pool of spenders possessing a relatively stable income source sheltered from business cycles, retailers typically prosper in a college market. While conventional wisdom would dictate that a higher share of retailing in a metro area would leave the local economy more susceptible to the vagaries of consumer spending, this is not necessarily the case in college towns. College town retailers are much more sheltered as discretionary spending is less volatile, and colleges are much slower to lay off staff. Think of it this way--if a student has a dollar in their pocket, he or she spends it.

Logically, college towns possess an above-average share of population in the 20 to 24 demographic, but metro areas with a strong college presence are also benefiting from the aging of the overall population. Few retirement areas provide as much cultural enrichment as a college town. From Charlottesville, VA to Ithaca, NY, you can always count on having plenty to do in a college town. If it is not university-sponsored concerts and lectures, your choice may be volunteer programs and sporting events. Retirees and college students are always looking for the same thing--a good time.

Generally healthier, more active, affluent, and better educated than preceding golden-age generations, the over-65 population is descending on college campuses like freshmen to a fraternity rush party. Retirement communities are sprouting on or near campuses, invariably in small towns and cities. It doesn't hurt that many universities also have top ranked medical centers.

College towns possess a skilled, well-educated labor force that is invaluable in attracting high value-added companies. The manufacturers that are based out of college towns are usually there to leverage universities' innovative capacity. R&D funding apportioned by most universities and the recent proliferation of business parks and incubators associated with university research facilities serve as a strong incentive to attract higher paying manufacturing jobs to college towns.

Finally, from a real estate finance perspective, properties located in college communities likely offer better cap rates than properties located in larger markets such as New York, Boston, Washington, and Atlanta. The mega real estate opportunity funds have generally limited their investments to primary markets, thus driving down cap rates and making properties more expensive in the larger cities. Colleges and universities are generally located in secondary and tertiary markets, markets often overlooked by institutional money. Nonetheless, REITS such as American Campus Communities, GMH Communities and Education Realty Trust are successfully tapping into the student-housing niche. What the evidence shows is that university markets hold commercial real estate appeal beyond the multifamily sector.

John Buttarazzi is the managing director of Liberty Hall Advisors, LLC and president of Varsity Capital Advisors, LLC. The views expressed in this article are the author's own.