For the past few weeks, we’ve been analyzing a series of promising Heartland metros that double down on the attractive characteristics of workforce housing.
So far, Cincinnati and Rochester shared some common themes: affordability, economic resilience, strong multifamily sectors, upside potential, and built-in downside protection that affords investors a lower risk profile than more traditional coastal markets.
This week, we’re traveling just 75 miles south from Pittsburgh along the Monongahela River to a West Virginia college town and home of the Mountaineers. You guessed it: Morgantown.
The Town that Morgan Built: A Quick History of Morgantown
Morgantown began life as a single homestead. After the Revolutionary War, Colonel Zackquill Morgan (how’s that for a name??) — son of Morgan Morgan (an even better name) — returned to the riverside territory his family had settled two decades earlier, hired a surveyor, and acquired a certificate to the land. Monongalia’s county seat was moved to Morgantown in 1783, but the hamlet really took off in 1826, when the arrival of steamboats transformed the Monongahela into a lucrative trade route.
Morgantown was never quite a boomtown, but a respectable coal and limestone mining business combined with glassware, pharmaceutical, and chemical manufacture put the town on the map. In 1867, West Virginia University (WVU) was founded under the land-grant university program as the Agricultural College of West Virginia.
Today, WVU is the town’s economic anchor, educating more than 29,000 students at a time in 14 colleges and 160 degree programs, and employing more than 6,500 faculty and staff. Other top employers include WVU Medical Center, Mon Health Medical Center, and the Morgantown Energy Technology Sector. While it’s a small town in comparison to the metros we’ve looked at so far, its strong healthcare and educational sectors comprise a robust economic backbone that can withstand recessionary pressures.
Local GDP growth has been measured, but stable — even during the 2008 recession.
While 2008 was harder on the jobs market than local GDP, Morgantown’s employment has fared somewhat better during the COVID-19 pandemic.
Much of the country still has a ways to go before attaining pre-pandemic employment levels, but Morgantown’s employment has bounced back fairly well so far, tracking more or less in keeping with national averages
Meanwhile, Morgantown’s value is unmatched in the region: It provides residents access to the city’s employment opportunities at impressively low costs-of-living.
The convergence of these features creates a promising set of opportunities for real estate investors.
Meds and Eds
Like we’ve argued time and again, metros with a strong “Meds and Eds” presence benefit from sticky demand that brings capital into town and keeps the workforce working — even when recession strikes. While Morgantown’s economy isn’t as large as those of Cincinnati or Rochester, the same effect prevails: the WVU system, and an abundance of local health services providers employ a large fraction of the city’s residents and create powerful downside protection — especially for more affordable multifamily real estate.
Morgantown’s resident population was just over 30,000 in 2019, and — over the past few years — WVU has educated between 28,000 and 30,000 students at a time. That means the city’s population virtually doubles for around 9 months out of the year: a significant influx of cash and temporary residents that protects the economy and drives growth for the local retail and service sectors.
Meanwhile, as smaller colleges across the country struggle to keep their doors open in the face of rising costs and wavering demand (not to mention a global pandemic), larger institutions like WVU are well-positioned to overperform. Deep pockets and steady demand will ensure the land-grant state schools aren’t going anywhere over the next few decades. For WVU in particular, relative geographic isolation makes the school a default choice for local residents who don’t plan to attend college out-of-state, and it’s likely that WVU will increase its enrollment as private colleges struggle.
What does that mean for real estate investors? Morgantown’s GDP and employment are strongly rooted in a set of established economic anchors that will continue to bring capital into the area for years to come. While that won’t create meteoric growth, the steady up-and-to-the-right performance should position investors to secure excellent risk-adjusted returns.
Affordable Rental Environment
Morgantown’s economy supports a deep value-laden rental market with plenty of room for upside.
The single-family market in Morgantown presents some residents with a structural obstacle: a 2020 report commissioned by the city government found that less than 40% of homes in Morgantown are priced under $200,000. According to Realtor.com in March 2021, Morgantown’s median home costs more than $223,000. Given the relatively expensive single-family market, it’s not surprising that a healthy fraction of residents opt to rent.
While fewer West Virginians rent than the US population in general, Morgantown’s renter fraction is much closer to the national average.
But, that data doesn’t tell the whole story: the 2020 city government report also found that Morgantown’s multifamily vacancy rate was only 1.8%. Heightened demand for rental units is usually accompanied by rent increases, and that has occurred in Morgantown to a point.
However, rents have yet to fully adjust to income. In 2019, according to the Census Bureau, median rent as a fraction of median household income countrywide was 20.03%. In West Virginia, that fraction was 17.86%. In Morgantown, it was only 16.49%. Rents absorb a far smaller share of tenants’ income in Morgantown than the rest of the state and country. When considered with high demand, this datum suggests that the market can withstand rent increases to capture the city’s stable GDP growth.
That said, the regional economy could be as important as the local economy. Morgantown’s affordable rental market has already captured some regional growth: 59.1% of employed persons living in Morgantown commute outside the city for work, suggesting that housing affordability could have potential to attract migrants working elsewhere in the area.
Meanwhile, like we’ve said before, rent increases are a proven strategy for capturing economic growth, and Morgantown’s rental market benefits from some of the same trends as the rest of the Heartland. As coastal markets impose increasingly untenable prices on workers and businesses, relocation to more affordable markets becomes an increasingly attractive alternative. While housing is Morgantown’s most decisive affordability advantage, overall cost-of-living in the city is 4% lower than the national average, according to Payscale.
From an affordability perspective, which will always be a growth driver, Morgantown compares favorably against most nearby options. In Charleston, the largest city in the state, rent as a fraction of household income was 17.63% in 2019. In Huntington, the second-largest city, that fraction was 18.8%. Pittsburgh is also nearby, and despite its size, its rent-to-income ratio was an only-slightly-lower 16.23%.
The data suggests that real estate investors are well-positioned to capture these opportunities; Morgantown’s rental market could absorb significant rent increases and still remain more affordable than the alternatives.
While the local economy is relatively stable, Morgantown’s demographic data tells a more aggressive growth story. The city’s population in 2019 was still relatively small at 30,549, but it grew a sizable 7.3% between 2010 and 2019. Meanwhile, the city’s median age is, according to the Census Bureau, an astonishing 24.6, compared to a national median of more than 38.
With a heavily young-skewed population, Morgantown should anticipate even more population growth to come, as young professionals migrate for the value and stick around to start families. A 2020 report commissioned by the city government projected that the greatest population growth in the city until 2025 will be in the senior citizen and millennial demographics — some of those most likely to rent.
Morgantown’s young professionals are also well-educated: in 2019, 55% of residents over 25 held bachelor’s degrees or higher. Educational attainment is a leading indicator that can predict income and GDP growth, and Morgantown’s proportion of residents 25 and older that hold bachelor’s degrees is more than 20% higher than the national figure.
In Summary . . .
Morgantown’s affordability and population growth, bolstered by resilient anchor employers, suggests strong potential for future economic growth that can be captured through rent increases in an undervalued market.
Over the longer term, Morgantown could also benefit from migration. Urbanization isn’t just a buzzword ; it’s a powerful force worth taking seriously, and as rural West Virginians look to move to a more urban hub, affordability and the prospect of stable employment could be decisive factors. And, as Morgantown has already demonstrated, demand increases justify rent increases that could be persuasive for prospective real estate investors.
Morgantown’s economy consists primarily of education, healthcare, energy, and — until recently — pharmaceuticals. In December, Mylan’s Morgantown plant decided to begin the process of closing its doors, prompting some analysts to wonder about the state of the local economy. Incidentally, that fact explains an anomaly on the chart we printed above.
While we don’t think Mylan’s departure will crater the local economy, it is true that Morgantown’s economy is somewhat smaller and less diverse than those of some other cities we’ve analyzed. While Meds and Eds have proven resilient so far, the comparative lack of diversity means Morgantown's economy may be more vulnerable to sector-specific shocks. Even if the concentration problem isn’t decisive, some sectors are well worth watching.
First up is education. Despite some uncertainties about the long-term state of higher education in America, we think large, public research universities like WVU will remain stable economic anchors. Realistically, schools like WVU are the least likely to suffer materially at the hands of economic fluctuations and are positioned to see increased demand and capture more value. WVU in particular commands consistent demand due to its relative geographic isolation: for residents of surrounding rural areas who don’t want to attend school far from home, it’s the default option.
The other economic anchor is the energy sector. On the one hand, energy is a powerful source of value. On the other hand, it’s not an especially consistent source of value, in that it tends to be somewhat cyclical and prone to more volatility than healthcare or education. Time will tell, but employers like the Morgantown National Energy Technology Laboratory site are worth watching.
We already mentioned that the multifamily vacancy rate in Morgantown is only 1.8%. Usually, high demand and low supply encourages construction projects — but Morgantown’s geography is unusually mountainous, which complicates development. While Core and Core Plus funds won’t worry about undertaking development projects in-house, limitations in the development possibilities landscape could place an eventual cap on upside if demand continues to increase.
Realistically, the short-term answer to this possibility is that property owners will probably increase their prices to account for a supply-side shortage. However, in the long run, Morgantown may not have the geographic potential for significant expansion.
Is downside protection built-in?
One side of the risk-mitigation coin is diversification: any investment that over-relies on a single sector will inevitably invite more risk than a similar investment that’s better-hedged against industry-specific hurdles.
But, the other side of the risk-mitigation coin is scale: a bigger basket can fit more eggs. Morgantown is significantly smaller than some of the other cities we’ve analyzed, which means that the economy will feel more shock if any local industry capsizes.
That said, Meds and Eds is a strong economic backbone because it benefits from consistent demand. Healthcare and education will always be sought-after, even in recessionary environments.
Finally, high demand relative to supply is its own downside protection. Multifamily occupancy rates in Morgantown are already elevated, and if the population continues to increase as quickly as it has over the last 10 years, demand will only intensify; those forces could help insulate investors against the effects of economic events that influence demand.
Morgantown demonstrates the power of slow, steady growth and the buoyancy of the healthcare and education sectors. That could change over the next decade, but either way, a handful of traits stand out:
- Morgantown’s population growth —is an impressive leading indicator.
- The rental market’s absolute and comparative affordability attracts tenants and leaves plenty of headroom for growth.
- With educational attainment more than 20% above the national average and a median age 15 years below the national average, Morgantown is well-positioned to expand rapidly in the next few years.