Housing Bubble Won’t Burst As Soon As It Should

I walked with a friend along Franklin Boulevard past the Matthew Knight Arena and he pointed to a restaurant and hotel across the street. “An Indiana group is planning to tear those buildings down and build even more student housing? How does that make any sense?”

A joke about a camper tying his shoes came to mind, but I’ll come back to that.

Anyone who reads the paper or sees construction cranes in the air or talks to anyone else knows what my friend was thinking. In the past few years, Eugene has exploded with student housing projects. Lane Community College built scores of units into its downtown campus. Capstone Development Corporation is building at 13th and Olive as fast as they can. Local developers have recently filled the south university neighborhood with large, luxury complexes.

Core Campus from Chicago has plans for a tower on Franklin Boulevard and other out-of-towners hope to build in Laurel Hill and Glenwood. Taken altogether, over a thousand new units soon will be coming on the rental market, offering over three thousand new beds.

Eugene has always had a certain reputation, but how many new beds can one sleepy town need?

We’re suddenly attracting attention from large national companies who specialize in student housing. How did developing student housing ever become an attractive specialty?

Thanks to government cutbacks and demographic trends, public universities are competing for students and dollars like never before. Students willing and able to pay out-of-state tuition are prized for the premium price they pay. Universities who compete best are universities on television most, especially during football season.

Picking a university to attend is a difficult task, but high schoolers often don’t recognize what psychologists call “confirmation bias.” It works like this: We get comfortable with or attracted to a particular option, then we gather information that confirms our choice.

It was the neon green socks on national TV that first got our attention, but we’d swear the real reason is the school’s petrological and volcanological research that expands into the realms of geochemistry and geobiology. Logic comes late to this party.

“I want to become a Duck!” is no different than “I’m cuckoo for Cocoa Puffs!” Branding sneaks in before the (conscious) decision-making begins. Children are notoriously bad at not knowing why they want what they want, but all of us are susceptible to confirmation bias.

Out-of-state students are welcome in Eugene, but they are not part of the local economy. They or their parents in Honolulu or Hamburg or Hoboken already are prepared to pay about $100,000 more than what an Oregon resident would pay for four years of tuition. An extra couple hundred a month in rent doesn’t add much more to the bill.

So supply and demand isn’t quite so simply in play. A new building, a great location, or a flat-screen TV is often enough to warrant the extra money.

Two campers were woken by a hungry bear. They bolted out of their sleeping bags to escape their tent. One stopped to tie his shoes. “Don’t be a fool,” his buddy said, “You can’t outrun a bear.” He finished lacing up and said, “I don’t have to run faster than the bear. I only have to run faster than you.”

Each new developer for student housing isn’t dissuaded by rising vacancy rates across town. Each assumes those vacancies will multiply for others while their newer, better buildings stay full.

But that can’t go on forever, right? What’s new can’t stay new. Eventually, won’t the glut affect them? Won’t they get caught barefooted when this little investment market turns bearish?

A developer with a track record of earning 10 percent annually will attract investors looking for a better return than banks can provide. Large developers can track which public universities are attracting the most out-of-state students, look for land near those schools, and build their business plans accordingly. Investors like Eugene right now.

The bubble eventually will burst, but not as quickly as logic would demand — thanks to ESPN and a little bit of confirmation bias.

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Don Kahle (fridays@dksez.com) writes a column each Friday for The Register-Guard and blogs