Assessing the potential of campus real estate

Colleges and universities today face multiple threats. Simply stated, these threats can be reduced to three categories – cost, competition and demand. Facilities and real estate, when strategically assessed, can provide a roadmap to investment in and harvesting value from an institution’s least-liquid assets.

What price knowledge
The cost of annual tuition and the cost for colleges and universities to obtain, retain and educate its students goes up and up.  In the 2018-2019 academic year, the national average cost of tuition, fees and room and board, according to the College Board was $21,370 for public in-state schools; $37,430 for public out-of-state schools; and $48,510 for private non-profit schools.

In order to support tuition costs and compete to fill their student body, colleges and universities must provide state of the art teaching, living, sports/recreation and dining facilities to provide an attractive offering to an ever more discriminating applicant population.

This comes in the form of significant capital investment in new facilities and upgrading or repurposing existing facilities.  In addition, there is competitive pressure to provide scholarships and financial aid to students to enable them to attend and afford the current tuition levels.  All of this creates tremendous pressure on annual budgets, endowments and capital campaigns.

Assets and liabilities
A report released in January 2019 by the National Association of College and University Business Officers and TIAA, a financial-services company, offered a sobering conclusion – “Endowments may not last for the long haul at the rate they are being spent.”  Of the money spent by endowments, over 50% goes to funding student aid, the balance goes to funding academic programs, faculty and lastly campus and facility investment.

Another significant but less visible cost facing colleges and universities is deferred maintenance.  The strategy taken by most institutions is to create a 10-year plan, budget to the fullest extent possible and endeavor to implement the plan.

However, it is not uncommon for unanticipated maintenance or replacement emergencies to occur that must be addressed and deplete the resources dedicated to deferred maintenance.  As a result, critical planned maintenance and replacement programs get deferred from year to year, increasing the exposure and the cost of addressing the challenges.  It is always more appealing to donors to invest in a shiny new building rather over campus infrastructure.

Survival of the cheapest
Colleges and universities face competition from lower-cost alternatives like on-line, global and community colleges.  These alternatives will create greater challenges as student decision-making becomes more value driven.

It is reasonable to anticipate that students will develop academic objectives based on their professional aspirations and will then design an efficient program, in terms of cost and time-to-complete, through multiple providers, to achieve these objectives.

Further, given the increasing globalization of commerce, many students may no longer consider their educational playing field limited to the US when they can receive their education in another country at a lower cost with the benefit of gaining meaningful academic, life and work experience outside of the US.

For the foreseeable future, the number of US high school graduates will remain flat and then decline, simply based on birth rate statistics.  This, coupled with a decline in adult learners means decline in demand, increasing the competition between institutions and from lower cost alternatives.

This is not a pretty picture. Higher education is extremely vulnerable to disruption from less costly alternatives.  The National Association of College and University Business Officers reported that the average tuition discount rate in 2017-18 for incoming full-time freshman in the US was 49.9%, a level that represents an unsustainable business model.

At desks or online
The current situation facing institutions of higher education requires a sober re-evaluation of an institution’s strategy for the future.  What can one get from a college or university that they can’t get online?  In fact, many students learn better when given the opportunity to hear content repeatedly and at their own pace.

Imagine the physical configuration of a campus where lecture halls are obsolete and much of the content is viewed on screen, independently and at each student’s convenience.  Review, Q&A and social interaction might occur in smaller seminar rooms with a TA or peer group to reinforce the learning experience.

Historically, strategies for most schools have been forged in a context where tradition, loyalty and a storied history play an important role in shaping a future.  As a result, many colleges may be slow to re-evaluate their situations.  Looking ahead to 2025, the majority of smaller institutions will be forced to re-invent and focus mission and investment on core strengths or new curricula. Those announcing new Centers of Excellence are already doing it.

This will have far reaching implications for the real estate and facilities of campuses.  The built environment is the least fluid component of an institution’s assets and will often serve as a physical and financial impediment to the changes that need to happen.

Reinvention and renewal
Over the past 20 years, partnerships with developers, either through ground or master leases, have become more common. They have been limited primarily to perimeter properties and non-academic functions like student housing and other specialty uses.

As institutions look ahead, a more careful analysis of the role of their real estate assets and their engagement with investors and developers will become increasingly important. This is especially true for well-located, high-value assets, but also for buildings requiring significant maintenance.

As institutions re-evaluate their futures, it will be invaluable to create a Strategic Facilities Assessment that supports overall institutional goals, in terms of programmatic space but also in terms of developing a rational financial evaluation of assets and the highest and best use moving forward.

The continuum of alternatives might look as follows:

  1. Demolish for functional obsolescence and repurpose site
  2. Invest and reposition building programmatically
  3. Perform deferred maintenance and continue current use
  4. Sell to third party operator and lease-back
  5. Monetize through sale or long-term lease to third-party

The outcome of such analysis will assist university leadership in understanding real estate and facilities as more than just a cost center but instead as a portfolio of assets that can be positioned strategically to generate income or equity for the institution to further the strategic objectives.

With a clear understanding of the opportunities for, required investment in, and value of their real estate portfolios, leaders of institutions of higher education will be better equipped to face the challenges of the next decade. Transformative academic and real estate strategies will enable them to pro-actively re-invent the model rather than become a casualty of the disruption overtaking higher education.

We assist the leaders of institutions of higher education in understanding the programmatic and financial cost and value associated with their real estate portfolio.  The preparation of a Strategic Facility Assessment can be an invaluable tool in assisting institutions to understand their assets and plan for investment, strategic partnership, sale or long-term lease.

Whitepaper By:

Joseph Fetterman, Executive Vice President
Colliers International

Barry N. Eiswerth, RA, NA
L.R. Kimball