A Toll brother’s student-housing bet goes bust in Pa., as falling enrollment squeezes dorm landlords nationwide

When Toll Brothers cofounder Bruce E. Toll paid $23.5 million for a 552-bed student housing complex near Kutztown University eight years ago, record-smashing enrollment at the Berks County college was translating into huge demand for rooms.

Since then, Kutztown’s student population has plummeted nearly 20 percent, and BET Investments Inc., which Bruce Toll formed in 1998 to diversify beyond his home-building roots, lost the Edge at Kutztown apartments earlier this year to foreclosure.

Toll’s experience in Kutztown has echoes nationwide — especially in the population-losing Northeast — as slowing enrollment growth tarnishes student-focused housing’s reputation as a recession-safe real estate bet.

The reversal is dividing the country’s university enclaves into a new category of haves and have-nots, with investment fleeing private housing projects aimed at students in small towns with less selective schools.

But even neighborhoods that have maintained investor interest, such as those around Philadelphia’s elite institutions, may be starting to feel the pinch when it comes to student-housing projects, which rent by the bed based on leases linked to the academic calendar.

“If you combine increased supply with enrollments that are decelerating at most schools — and turning negative at a lot of smaller schools — you end up with more beds than students,” said Rob Goldstein, who helps manage Plymouth Meeting-based CenterSquare Investment Management LLC’s real estate securities portfolio. “I think that’s starting to catch up with the industry.”

The delinquency rate for non-government-backed commercial mortgage-backed securities — a type of bond composed of property loans — for student housing projects spiked at a high of 9.4 percent in February and remained elevated in March and April, according to the debt tracker Trepp LLC, which began monitoring the asset class in 2004.

Only a fraction of the nation’s student-housing properties involve CMBS financing, which is more trackable than other forms of debt, but the conditions behind those missed payments appear to be widespread.

Nationwide, undergraduate and graduate-student enrollment, including part-timers, fell by about 5 percent to 22.3 million in 2017, the most recent year for which U.S. Census estimates are available, from the start of the decade, when schools were becoming crowded during the tight job market that followed the Great Recession.

During that same period, though, student-housing supply increased by more than 47 percent nationally to more than one million beds, according to an Inquirer analysis of data from market tracker CoStar Group, which excludes projects with fewer than five living suites.

The enrollment declines correspond to a more general flattening of birthrates in the United States, which further decelerated during and after the recession, said Alex Bloom, a consultant with EAB Global Inc., a Washington-based provider of research and advisory services to universities.

Many colleges in the West and South, where population growth remains steady, have avoided the brunt of the enrollment losses, Bloom said. Schools that award sought-after degrees and large public universities with robust educational, athletic, and social offerings also continue to attract students.

Worst off are middle-tier schools in low-growth regions, such as Kutztown.

Enrollment “used to grow because every year there were more high school graduates than there were the year before,” Bloom said. “We’re now at a period where that’s going to decline precipitously.”

The enrollment drops may signal a new phase in a development cycle that began in the early 1990s, when the type of university dorms familiar to many of today’s adults — think cinder-block walls, lines for the shower, and smoking lounges — were nearing the end of their useful lives.

Rather than upgrade those accommodations, many schools repurposed former dorms for other academic uses and teamed with private developers to build sleek new dwellings with such fancy touches as in-house gyms aimed at impressing potential students and their parents, said Stephanie Gordon, vice president for professional development at NASPA, a Washington-based association of student affairs administrators.

Developers in some communities eventually struck out on their own with off-campus complexes operated independently of nearby universities, whose own dorms were totally booked.

The dorm-building boom benefited small, regional campuses because it enabled them to claim a greater share of the growing college-bound cohort than could have been accommodated by their existing stock of homes.

And fueling much of the construction was an appetite for student housing among investors, who saw the projects as good shelters from bad economic times because university enrollments are generally unfazed by downturns, said Goldstein of CenterSquare.

A big portion of that investment came from overseas pension and sovereign wealth funds, such as the real-estate arm of Singapore’s state investor Temasek, which last year added the 850-bed Evo at Cira Centre South tower in University City to its already large portfolio of student housing in the United States.

As a result of this investor interest and temporary enrollment uptick, “there have definitely been assets in certain markets that shouldn’t have been built,” said David Adelman, chief executive of Philadelphia-based Campus Apartments LLC, which owns or manages properties serving about 50 schools in 18 states. “You’ve had developers who haven’t looked at data at all and it was all determined by their ability to find a piece of land and obtain bank financing.”

Faced with declining enrollment, some schools have begun expanding the number of years that undergraduates are required to live on campus, at least in part "so that their beds are filled and there’s a revenue stream,” Gordon said.

Among those adopting such a policy was Kutztown University, which in 2017 began requiring most students to live on campus through their first four semesters.

The change was made to better expose students to "programs in place that support both academic and social growth,” said Matt Santos, the school’s vice president for university relations.

Michael P. Markman, president of Bruce Toll’s BET, said in an email that Kutztown’s enrollment drop — from 10,707 at the start of the decade to 8,309 in 2018 — and the on-campus residency requirements were what doomed its ownership of the Edge student-housing complex, which is about a half-mile north of campus.

The complex, which comprised almost half of the town’s 1,285 privately owned student beds as of last year, based on CoStar’s data, fell into foreclosure in January, as Dresher-based BET reported to its lender that the property’s occupancy rate had fallen to about 66 percent, down from being nearly full a year and a half earlier.

The company said it was no longer earning enough from the property to keep up with its mortgage payments, according to a Trepp report.

BET’s fortunes as a student-housing landlord stand in contrast to those of Campus Apartments, which last year completed four student-housing projects, the most since it began operations in 1958 as a buyer of West Philadelphia properties for rental to University of Pennsylvania students. It now has more than 21,000 beds under management nationwide.

Two of the new dorms are at University of Michigan-Ann Arbor, a large, highly ranked public university that has bucked the nation’s downward enrollment trend, and one is at University of Tennessee-Knoxville, which has an improving academic profile and an energetic Southeastern Conference athletic scene.

The fourth is the 100-bed Simon apartments in West Philadelphia at 41st and Sansom Streets near Penn, a highly selective Ivy League institution.

American Campus Communities Inc. of Austin, the nation’s largest student-housing landlord, is likewise continuing to prosper by focusing on the country’s steadiest-footed schools, said Ryan Dennison, senior vice president for investor relations and capital markets at the publicly traded real-estate trust.

Across nearly all of its 69 markets, where it owns 170 properties comprising 109,100 beds, ACC has room to grow by offering students a better value than the conventional neighborhood dwellings where many continue to live, Dennison said.

“There’s more demand for purpose-built student housing than there is supply,” he said.

Yet, even in Philadelphia’s university districts, where ACC’s properties include the 1,315-bed Summit at University City near Drexel University and the 749-bed University Village near Temple, student-housing construction has been outpacing enrollment growth.

Between 2010 and the current academic year, total enrollment at Penn, Drexel, and the University of the Sciences increased 2.4 percent to 52,725, according to a tally of school data. But the number of student-housing beds in the 19104 zip code surrounding those University City schools surged during that period by nearly 93 percent to 6,072, according to CoStar.

At Temple, enrollment increased just over 7 percent to 40,031 over that period, but the number of new student-housing beds in the surrounding area bounded by Girard Avenue and Dauphin Street, between Eighth and 20th Streets, jumped by almost 67 percent to 3,590.

Absent from those counts are new on-campus projects run by universities themselves, such as the 350-bed New College House at Penn and Temple’s 1,275-bed Morgan Hall.

Also playing a role in university-area supply is the rapid increase in conventional apartments near Philadelphia’s campuses, which is outpacing the city’s overall growth in rental units, according to calculations based on CoStar data.

The student housing-led growth of new dwellings in university neighborhoods appears to be having an impact.

The nonprofit owner of the International House Philadelphia tower at 37th and Chestnut Streets, for example, has cited an inability to compete with all the new student-focused inventory as a major factor in its decision to close the 49-year-old dorm building.

And near Temple on 19th Street, between Berks and Montgomery, the owners of a six-year-old, 122-bed student-housing project known as Campus View Apartments were at least 60 days late on their mortgage payments in April, according to Trepp’s latest report on the property.

Herbert F. Reid Jr., president of Maze Group Development, which owns the project, did not respond to a phone call to ask whether the delinquencies are due to competitive pressures.

Even more private student housing is on its way.

This fall, Blue Bell-based developer Goldenberg Group will boost the Temple area’s inventory of private student housing by 27 percent when it opens its 984-bed Vantage dorm tower near 11th Street and Cecil B. Moore Avenue, just to the south of its existing 832-bed View at Montgomery apartments.

Goldenberg executive vice president Seth Shapiro said that the Temple area has long suffered from a dearth of purpose-built student housing, but that demand will be largely met once the Vantage leases up.

“Right now, we feel we are meeting demand,” he said. “There’s enough.”

Around Kutztown University, meanwhile, at least one developer is interpreting things differently.

Greg Sarangoulis, owner of Reading-based contractor GMI First Inc., is nearing completion of the first part of a planned three-building student-housing complex with 1,348 beds just southeast of campus. He’s calling it Advantage Point.

In July, he took out a $22 million mortgage for the project from Toronto-based lender Romspen Investment Corp., which reportedly charges rates of about 11 percent — higher than conventional banks — for loans that have to be refinanced or repaid after one or two years, according to records filed with the Berks County recorder’s office.

Sarangoulis did not respond to phone and email messages from the Inquirer, but told the Reading Eagle early last summer that he remained optimistic about the project.

“I think there’s been a slight uptick in the student population," he said.

Enrollment actually slipped by 20 students between this academic year and last, according to the university.