A Surge in This Industry Is the Perfect Recipe for Investors

During the pandemic, college enrollments dropped sharply, but recently, there has been a big wave of applications. In a video clip from "Ask Us Anything" on Motley Fool Live, recorded on Feb. 28, Fool contributors Matt Frankel, Dan Caplinger, and Nicholas Rossolillo answer a member's question about American Campus Communities (ACC), the largest student-housing business in the country. 

Matt Frankel: Sure. A few points about that. One, college enrollment dropped during the pandemic. There are about a million fewer college students in the United States than there were before the pandemic. Applications are rebounding sharply. A lot of students decided to say take a gap year in 2020 because they couldn't be on campus at all or things like that. We just saw the data from 2021 and college applications for the 2021-2022 school year were up 19.8% over pre-pandemic levels. Not just over the slowdown pandemic year, but over the 2019 school year.

So college applications are rebounding, they're expecting more of the same in fall 2022. Not only that, new supply of student housing is expected to be at its lowest level in over a decade in 2022. So you're getting the surge of college applications. You're getting the slowdown in construction due to supply chain disruptions, materials, costs things like that. Those are a great recipe for growth in the industry. Beyond that, don't worry too much about hybrid and online education, which a lot of people are when it comes to the student housing industry.

I'm pretty sure there are people on this call who are closer to college-age than me. But having said that, a lot of people want to take college classes online, they don't want to live with their parents while they're doing it. There's no desire by the nation's college sophomores and juniors to go live at home to take online classes. Online classes weren't a thing when I was in school. I would've gladly enrolled in a schedule of classes I could've taken from my apartment near campus. I wouldn't have wanted to live in my parents' house to do it. That's one big thing people are missing.

I'm very bullish on the student housing industry long-term, and the pandemic really just showed the value of purpose-built student housing as opposed to living on-campus, the traditional option, because these purpose-built facilities didn't close when the pandemic hit. They didn't kick the students out. They don't close over college breaks. They don't make the students go home. People still had freedom to move about the building during the pandemic. It was a lot more freedom, a much more desirable living environment, and really it underscored the value of that option.

I like American Campus Communities more than I did before the pandemic. I've added to my position several times in the past year or so, and the recent earnings from the company are fantastic. So I'm a big believer in student housing. I don't know if any of the younger guys on the call have any other thoughts on it.

Dan Caplinger: Here I was about to weigh in.

Frankel: Oh, no. Go for it. Go for it. It's OK.

Caplinger: I don't count as a younger guy here.

Frankel: Young at heart.

Caplinger: I mean, I will be the first to agree. The prospect of living with my parents any longer than I needed to when I was college age is like no, let's start our lives, let's get going. I don't think the pandemic's going to stop anybody from doing that.

But at the same time, it's important I think to put this into the broader context and yes, it may be the interest rates are one factor that play some kind of role in real estate and it may well be that and definitely, supply and demand do, but you take a look at how the real estate market's been performing recently and it doesn't look as much tied to interest rates as it does look tied to a desire to diversify, a rebound in prices in a lot of markets, the disruptions of the pandemic, but also the demographic trends that it's fostered.

I think you have to look at all of those things, not just interest rates when you're looking either at a specialized real estate investment like college-related housing, student housing, or when you look more broadly at the market. Nick, any thoughts on that?

Nicholas Rossolillo: I actually have a question for Matt on this, too. I'm wondering because I have not looked at this as an investment very much, but some of the statistics about Gen Z, it's a very large part of the demographic in the United States, and I've also seen statistics about how it will end up being one of the best-educated or the most educated demographic by the time it's all said and done. How much of this spike in applications, there's the pandemic effect, but just the size of this group of young people starting to move through the education system, go to college, is this like a long-term trend like as long as Gen Z is in grow-up mode? Stock like ACC has this great growth potential, growth runway ahead of it.

Frankel: Sure, that's a good point. So far we've really only talked about the short-term tailwinds, which you're right. Some of it's from the pandemic like a lot of people put college on hold for a little while. You're also seeing the uptick because of the Gen Z thing and because people are seeing what it's like to live through times of uncertainty and how it's easier if you're educated.

The biggest surge of college applications other than this year in the past 30 years was right after the financial crisis. When people saw how the unemployment rate between the educated and people without college degrees, there was a giant gap between those, and it really kind of made a lot of people want to go back to school, a lot of people want to finish their degrees, things like that.

I think we're seeing some of that right now and I think Gen Z, their parents specifically emphasize education a lot more than previous generations, and I do think that will be a long-tailed growth driver for ACC. That's a good point.