Student loan repayment is a hot topic these days, and TalentWoo weighs in on its impact on various real estate sectors. Those that are impacted negatively may experience softening revenue and company rightsizing. The beneficiaries however may need to be prepared for strategic hiring.
Introduced in early 2020 at the onset of the health crisis, the CARES Act froze repayment and interest accumulation on federal student loans, giving borrowers with these loans some breathing room. However, the Biden administration introduced a forgiveness plan for qualifying borrowers, and if implemented, the plan could wipe away between $10,000 and $20,000 of federal debt for eligible borrowers. Uncertainty surrounds the plan, however, as it faces challenges in court. In the meantime, whether or not the Court allows some debt forgiveness, loan repayments will begin 60 days after the announcement. The return of this fixed expense that many households have not contended with in three years will likely weigh on consumer spending, stacking on top of existing inflation pressure and recessionary fears.
With approximately $1.6 trillion in student loan debt distributed among 44 million borrowers, it is no surprise that the negative repercussions of this level of student loan debt are already prevalent among millennials and could begin to impact the older members of Gen Z. The volume of student debt holders is substantial enough that the impact of repayment will lower the purchasing power of both cohorts.
Based on the historical impact of student loan debt on personal finances observed in the millennial generation, three main property types are likely to be affected by resuming repayment: multifamily, retail and hospitality.
Multifamily properties may see advantages from the resumption of debt payments as consumers with student debt are likely to rent longer, delaying life events such as first-time home purchases. This adds to other factors making the transition to homeownership more challenging, such as limited for-sale listings propping up asking prices and elevated mortgage rates. The affordability gap, or the difference between a monthly payment on a median priced home and monthly average effective rent, is widening. At the end of 2022, this metric was around $1,142, the highest difference since at least 2000, emphasizing the comparative affordability of renting.
However, an adverse effect of student loan repayment on the property type should be noted. Household formation could slow as borrowers potentially delay moving out of their parents’ house or opt to split costs with roommates.
Retail sales and leisure travel may also be impacted by falling discretionary spending as it is likely that resuming student loan repayment will dampen discretionary spending. An estimated 34 percent of adults between the ages of 18 and 29 have some student loan debt, along with 49 percent of the age 30- to 44-year-old cohort. As households absorb this extra expense, budgets will adjust — particularly in younger groups — potentially impacting retail sales. Properties anchored by grocery stores and budget-oriented tenants will likely fare best as consumers turn to preparing food at home and go to greater lengths to reduce discretionary spending.
Finally, the hospitality industry may be affected by resuming student loan repayment. Millennials, the largest cohort of student debt holders, have a well-documented preference for experiences over goods, making them a critical market segment for the leisure and hospitality industry. As the resumption of loan payments pulls from discretionary spending, they may opt to scale back on travel, eating out, and other entertainment activities.
If your multi-family organization is in need of strategic hiring solutions, contact TalentWoo today. Our expert real estate recruiters can help you define, target and on-board the right leaders to maximize efficiency, profits and returns to investors.