Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / The Hidden Economics of Empty Schools
Transcript
- Lucas: Let’s talk about the empty desks. In South Korea’s Gyeonggi-do province, which borders Seoul, over three hundred primary schools have been consolidated or closed since two thousand nineteen. That isn’t just a social story; it is a massive liquidity event for local municipalities that built those schools twenty years ago. Luna: Right, because those buildings represent billions in municipal debt that doesn’t go away just because the student population vanishes. It’s like holding onto a mortgage for a house you can’t live in anymore. Lucas: Exactly. And the timing is brutal. These schools were built during the last significant baby boom tail end in the early two thousands. The bonds were issued based on projected enrollment that simply never materialized. Now, they are sitting on depreciating assets with fixed interest payments. Luna: So we are looking at a scenario where local governments are essentially underwater on their own infrastructure, trying to service debt for capacity they no longer need. Lucas: Precisely. And unlike housing, which has some residual value even if the market cools, an empty school is a liability. Maintenance costs for large concrete structures don’t drop significantly when occupancy hits zero. You still have heating, security, and structural upkeep. Luna: It reminds me of the ghost malls from the retail downturn, but worse, because you can’t really sell a school to a retailer without expensive zoning changes. Lucas: That is the crux of it. Zoning is the bottleneck. Most school districts are zoned strictly for educational use or low-density residential. Converting a gymnasium into a warehouse or a data center requires re-zoning, which takes years of political friction. Luna: And who wants to buy a former elementary school in a town that is losing population anyway? The buyer pool shrinks as the demographic trend accelerates. Lucas: True. But there is one sector that is desperate for space in these exact areas: seniors. As we discussed in previous episodes, the silver economy is expanding rapidly. There is a growing movement to convert underutilized schools into assisted living facilities. Luna: Because seniors need ground-floor access, communal spaces, and often proximity to family—though family might be moving away. Is that actually working in practice? Lucas: It is working in pockets. In Japan, several municipalities have successfully turned closed schools into multi-generational community hubs. But in the US and Europe, the regulatory hurdle is higher. Health codes for medical care are much stricter than education codes. Luna: So you have a mismatch between the asset type and the new demand. You can’t just slap a nursing license on a classroom without a complete overhaul. Lucas: Correct. And that renovation cost eats up the equity. If a school was bought for ten million dollars, and it takes twelve million to retrofit it for healthcare compliance, the municipality is stuck paying to hold the asset while waiting for a buyer who will take it at fire-sale prices. Luna: That sounds like a slow-motion fiscal disaster for rural towns. They lose the property tax revenue from the school being operational, but keep the tax burden of owning the building. Lucas: Worse. They often have to pay for demolition if the building becomes unsafe. And demolition is incredibly expensive. You have to abate asbestos, remove lead paint, and haul away tons of concrete. Luna: Which means the net proceeds from a sale are often negative. The town pays someone to take the building off their hands. Lucas: Yes. And that creates a moral hazard. Local officials know that if they build too aggressively now, their grandchildren will inherit the bill. So there is a perverse incentive to delay construction until the very last moment. Luna: Which leads to emergency closures later, when the political capital to manage a transition is gone. It’s reactive governance at its worst. Lucas: Let’s look at a specific number. In South Korea, the total fertility rate hit a historic low of zero point seven two last year. That means half the schools currently open will likely close within fifteen years unless immigration patterns shift dramatically. Luna: Zero point seven two is staggering. That’s not a dip; that’s a structural collapse. How are cities coping with the sheer volume of upcoming vacancies? Lucas: They are experimenting with flexible zoning. Some districts are allowing schools to be sold to private developers for mixed-use projects. You get apartments on top, retail on the bottom, and maybe a childcare center on the ground floor. Luna: But does that generate enough revenue to pay off the original bond debt? Or is it just a stopgap to reduce maintenance costs? Lucas: Usually the latter. The revenue from selling the land rarely covers the full outstanding debt. The gap is funded by general operating reserves, which means other services suffer. Libraries get cut. Parks get neglected. The school closure bleeds into everything else. Luna: It’s a contagion effect. One demographic metric triggers a chain reaction across the entire municipal budget. Lucas: And here is the kicker. The children who are left in these shrinking districts often face larger class sizes because the district consolidates multiple small schools into one mega-school. So the remaining families subsidize the efficiency gains. Luna: That feels unfair. The people staying in the area are paying more for fewer options, while the asset value of the community depreciates. Lucas: It is fundamentally unfair. And it pushes out the middle class. If you can’t afford to move to a growing district, you are trapped in a declining tax base with decaying infrastructure. Luna: So this isn’t just an economics problem; it’s a geographic inequality problem. The map is getting redrawn by birth rates. Lucas: Exactly. We are seeing a bifurcation between high-growth sunbelt cities, where schools are overcrowded, and aging rustbelt or rural areas, where schools are empty. The capital flows to the growth, but the debt stays behind. Luna: It’s a classic case of asymmetric risk. The upside is capped, but the downside is infinite. Lucas: I want to pause here for a second. If walking through the economy with us has made something click, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that is literally what funds making this many of these. Luna: It keeps the lights on and the research deep without advertisers dictating the agenda. I appreciate every single contribution. Lucas: We do not have ads, so your support is the direct engine of this show. It allows us to dig into the details like this school debt crisis instead of skimming the surface. Luna: Yeah, and it means we can stay independent. Thank you for keeping this going. Lucas: Back to the numbers. The Federal Reserve has noted that commercial real estate stress is high, but residential school conversions are barely on their radar. They are missing a huge segment of the distressed asset market. Luna: Because investors are looking at hotels and offices, not old elementary schools. They don’t see the opportunity in the zoning complexity. Lucas: Or they do, but only if they have the patience to navigate local politics. This is where specialized private equity firms could enter. Buy the debt, negotiate the conversion, flip the asset. Luna: But that requires a level of institutional knowledge that most generalist funds don’t have. It’s a niche within a niche. Lucas: It is. And that specialization barrier is why most municipalities fail to monetize these assets effectively. They try to sell to generalists, who lowball them, and then the town loses money. Luna: So the smart money isn’t buying the building; it’s buying the right to change what the building is. Lucas: Spot on. The value is in the permit, not the concrete. Once you have the zoning change approved, the land value jumps significantly. Luna: That’s a lesson for any investor watching this. Look for assets where the regulatory unlock is the main driver of value. Lucas: Absolutely. Demographics dictate the demand, but regulation dictates the supply. When those two vectors cross, you get these strange, illiquid markets. Luna: And until the regulatory frameworks adapt to the new reality of fewer children, those illiquidity premiums will keep depressing municipal balance sheets. Lucas: It makes you wonder if we should be treating schools less like temples of education and more like modular infrastructure that can be repurposed as the population shifts. Luna: A pragmatic view, even if it feels cold. But given the fiscal reality, pragmatism might be the only thing saving these communities from bankruptcy. Lucas: Perhaps. The question for the next decade is whether local governments will innovate fast enough to turn this liability into a manageable transition, or if they will drown in the maintenance costs of ghosts.