The Crimson Bubble
The city of Tuscaloosa steps in to dam a flood tide of new student housing. Planners and property owners see a bubble fueled by short-term, private equity investors.
Steven Rumsey, who owns 147 rental units, says a drop in the university’s above-average growth trajectory will leave the market hollow.
The new cheer for the University of Alabama could easily be, “Grow Tide.” For the past 10 years, student enrollment at the university has increased by an average annual rate of 1,500 students, swelling the student population from approximately 20,000 in 2003 to nearly 35,000 for the current school year.
Normally, market forces would dictate that new student housing would increase at a similar rate. But in a trend that surprised Tuscaloosa city officials, there recently has been a construction boom, to the point that the city now expects to have a significant oversupply of such housing beginning next year and extending through at least 2018. And that appears to be the best-case scenario.
“There’s really not much we can do (to avoid a housing glut),” Tuscaloosa Mayor Walt Maddox says in January. “We’re just trying to tap the brake (on new construction) to keep it from being worse.”
Much of the problem originated in the aftermath of the tornadoes that hit Tuscaloosa in 2011. Maddox says a housing study was conducted that showed the city needed to add 1,200 bedrooms over the next five years to meet the projected growth. Soon thereafter, construction began on a mega 1,100-bed development called The Lofts at City Center, located off 15th Street on the site of the former 13.5-acre Wood Square Shopping Center, which was destroyed by the tornado.
“At the time, we all believed that would likely end any future mega-student complexes for the foreseeable future, because we believed the market would take care of itself,” Maddox says. “We didn’t think the banks would loan for anything else. But the private equity markets stepped in where the banks were not.
“So unfortunately, what we saw was a continued move toward additional student housing. In fact, thousands more apartment units were planned after that development. And as these mega complexes were coming into our city, they weren’t worried about the supply-and-demand models.”
As a result, an additional 1,500 new bedrooms are scheduled to become available in Tuscaloosa this year, with another 3,000 expected to hit the market in 2015. So last June, with area residents and property owners expressing concern, Maddox established a Student Rental Housing Task Force to analyze the data, establish long-term housing projections and offer some solutions.
Members of the task force talked with managers of many of the large-scale student housing projects in the area and with the Tuscaloosa police department to gather crime statistics. Five months later the task force issued a report that Maddox says “was a clarion call on the matter.”
“They found that beginning around 2015, there would be a minimum of 3,000 more bedrooms than what was needed in the market,” Maddox says. “Basically in 2015 we would already have the number of bedrooms that we’d need through 2018. We would go from 97 percent occupancy to 91 percent, and that would begin a trend downward.
“After seeing (the report), I felt like the city needed to step up and address the issue. Normally the city would not involve itself in market conditions, such as the number of apartments being built. But (an oversupply) would lead to vacant buildings, blighted properties, high crime areas and a negative impact on our infrastructure, and the taxpayers would start taking on the burden of all that.
“One of the many things the task force said is that there is a public purpose for the city getting involved in this matter. There was a consensus across the private, public and political spectrum that something had to be done.”
In November, the Tuscaloosa City Council voted unanimously to adopt all of the task force’s preliminary recommendations. This included a temporary halt to the construction of any new student-housing mega-complexes (which the task force defined as a development with 200 bedrooms or more) and a series of rezoning measures to disallow the creation of four- and five-bedroom units that have limited appeal to anyone other than students.
“These aren’t your typical apartments. It’s more like boarding home or dormitory-type housing,” Tuscaloosa City Planning Director John McConnell says. “It was rent by the bedroom, so whenever any bedroom isn’t being rented, the manager can just lock it up.
“The concern is that if the university’s enrollment doesn’t keep pace with the amount of housing being built that is specifically designed for students, then what life would that project
have when it is no longer feasible for it to be occupied by a student? That’s when owners start discounting rent and offering incentives, and you get a mixture of non-student populations in with the student populations. Decline can come a lot quicker for those types of housing.”
The problem, McConnell says, can be amplified when such complexes are created by companies located outside of Tuscaloosa that do not have a vested interest in the long-term viability of the project, or the impact it might have on the city.
“These are short-term investments for them,” McConnell says. “These aren’t banks loaning money to property owners to build these projects. They’re private investment groups who are investing in the construction and then essentially flipping the projects. They’re getting their return and leaving us with whatever happens in the future. The impacts on our community long-term are something we have to consider locally, but the investors involved don’t have to consider that.”
Business Alabama made repeated attempts to contact several of the big out-of-town developers, including Capital Growth Properties, which is responsible for the $100-million Lofts at City Center; Trinitas, the Indiana developer trying to win approvals for a $36-million project, and Atlanta-based Chance Partners, which has completed several smaller projects recently, including Boulevard Lofts, Townhomes at Metal Works and Green Bear Lofts. None of the firms responded.
Adding to the concern about this housing glut is the possibility that the University of Alabama will be unable to maintain its steady growth in student enrollment much longer. The annual increase already has dipped to approximately 1,000 students. University spokesman Chris Bryant was quoted late last year by al.com as saying, “Continued growth is expected at UA, but at a slower pace than in recent years.”
Enrollment could take an even bigger hit than anticipated if the popularity of online education continues to increase. According to a survey released last year by the Babson Survey Research Group, of approximately 2,800 colleges and universities, more than 6.7 million people took at least one online higher education course during the fall of 2011. That was 32 percent of the total enrollment in higher education that year, and an increase of approximately 600,000 people from 2010.
As online education becomes more accepted, there is increasing speculation that physical attendance at universities will begin to decline, perhaps as soon as the end of this decade. If that happens at the University of Alabama, then the coming housing glut would be more severe than expected.
“A lot of my fears arise from the obstacles that higher education are going to encounter over the next few years,” says Steven Rumsey, a lifelong resident of Tuscaloosa who owns 147 rental units and is a member of the city’s planning and zoning commission. “If there is even a hiccup in growth, we’re concerned that we’ve allowed too many developers to come in here and build based upon a growth model that is unsustainable. Unless the university can buck all the national (enrollment) trends, eventually we’re going to have an imbalance.
“Now, is it the city’s job to manipulate the behavior of the consumer? Perhaps not. But the future development of our city is at stake, and the people who are spending $40 million a pop on these developments don’t live here. They’re not waking up in the morning as their tenant base is degraded, and something that was built for students is not even a student complex within five years. We are trying to stop (projects) that may be doomed to failure long term. And the victim is not the developer or the owner. It’s the city itself,” Rumsey says.
The recent restrictions passed by the City Council were applauded in a Tuscaloosa News editorial entitled “City Must Stop Glut of Student Apartments.” The article stated that while a changing landscape in Tuscaloosa is an inevitable part of progress, “transforming the character of whole sections of town through ill-advised development that doesn’t match the market’s need can and should be avoided.”
Maddox says at this point there’s little to be done about 2015’s predicted housing overages. “We’ll just have to let the market eventually work out that aspect of things. But we would rather do what we’re doing now and deal with 3,000 extra over the next four years, than do nothing and potentially have 5,000 to 7,000 to deal with.”
Cary Estes is a freelance writer for Business Alabama. He lives in Birmingham.