10 ways over-expanded colleges can maximize real estate assets

Between 2008 and 2018, expansion on college campuses ranged from 8.5% to 19%
By: | August 3, 2021
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Joanne Pizzo

Joanne Pizzo

A college campus is not, contrary to popular opinion, an idyllic island. Our colleges and universities are in crisis mode.

Attempting to attract new students, college and universities—flush with students and cash derived from increasing tuition and/or state budgetary largesse—have for years competed with each other by building shiny new buildings. Between 2008 and 2018, expansion on college campuses ranged from 8.5% to 19%,

Much of this expansion was driven by a need to replace or renovate aging infrastructure, to keep pace with programmatic changes and to meet student expectations. This led to what has been referred to as an “Edifice Complex,” described by The New York Times in 2012: “A decade-long binge to build academic buildings, dormitories and recreation facilities —some of them inordinately lavish to attract new students—has left colleges and universities saddled with large amounts of debt.”

It has also exacerbated the deferred maintenance or capital renewal crisis that places existing buildings in jeopardy: all eyes were on new—not existing—buildings. It’s clear now that this course has become unsustainable.

The outlook for college enrollment is one of continued challenges. The ongoing decline in enrollment is expected to accelerate, with a 15% drop in enrollment after the year 2025. The current decline in enrollment has resulted in a decline in revenue, leaving many institutions with no choice but to somehow reduce costs. Colleges and universities are shedding programs, faculty, and facilities. They are merging and closing.

A college or university’s real estate assets are often an untapped source of potential for unlocking capital, for attracting and retaining students, for supporting the academic mission, and—as a large portion of an institution’s balance sheet—for driving down fixed costs. The entire scope of real estate assets—land and buildings—is there to be optimized.

Here are 10 specific strategies for leveraging real estate:

1. EVALUATE: Colleges and universities should catalog and evaluate their physical spaces and available resources, and align that information with the institution’s aspirations.

Factors to be analyzed include not only whether the number, size, and type of classrooms are in sync with the campus’ pedagogy, but how campus space is being used. Administrators must consider imminent and prospective needs, functionality and location of buildings.

2. REPURPOSE: Preservation is often a driver for colleges and universities, which often repurpose iconic older buildings for legacy purposes. Falling somewhere between new construction and renovation, “repurposing” projects boldly re-imagine an existing building or space and can introduce entirely new functions and operations.

3. RENOVATE: Renovation preserves campus character, reduces cost and the project timeline, incurs less restrictive code requirements, and promotes sustainability. Rather than looking at just one cycle, design and facilities teams should build resiliency into each project: planning for minor refreshes every three to six years, minor renovation every 10 to 12 years, and major renovation every 20 to 30 years.

Forecasting and earmarking future budgets will minimize costs and ensure that the facility continues to look and feel relevant.

4. CLOSE: Colleges and universities are closing underutilized and underperforming buildings or buildings that are simply past their prime. Closing these buildings reduces operating costs, energy consumption, the deferred maintenance backlog and, potentially, taxes.

5. DEMOLISH: Demolishing buildings essentially does what closing them does while eliminating the eyesore of a closed building on campus. However, it also leaves a hole in the campus fabric and in alumni memories. The campus fabric can be healed with judicious planning and design: the memories may need a good PR campaign.

6. STRATEGIC ALLIANCES, MERGERS AND PARTNERSHIPS: Universities are considering sharing services, either within the campus or amongst two or more other institutions. Although the dynamics and scope of mergers differ significantly, most are driven by current financial woes made worse by the Covid-19 pandemic fallout.

There are a variety of directions a future consolidation might take, ranging from sharing facilities, consolidating academic programs, combining administrative services, joining a purchasing consortium and sharing buildings—to closing one or more campuses. Shared services offer an economy of scale that may lead to decreased costs and greater value for the institution. However, care must be taken: attaining that economy of scale can require a large and challenging expansion of scope.

7. REFINANCE: Changing the current economic forecast may include tactics that are drastic or measured, and that may include: cutting faculty or programs, lowering tuition, eliminating some types of financial aid, refinancing long-term debt with tax-exempt bonds and emergency fundraising These measures must be undertaken with careful consideration and discourse, understanding of the institution’s strategic goals and with full transparency.

8. SELL/LEASE: A piece of property may be of minimal importance to the character of the institution but significantly attractive to potential developers or third-party users. In March, 2021, 107-year old Urbana University in Ohio, put itself up for sale—all 115 acres, 22 buildings, athletic fields, solar farm and surplus land. CBRE is marketing it as “…a rare opportunity for both educational and institutional users as well as investors looking for a unique redevelopment opportunity,” and suggests that corporate or residential conversion developers might also be interested.

On the other hand, renting or leasing property to a third party allows the institution to maintain control while bringing in income, and maintaining ownership of the asset. Ground leasing land gives a developer a right to own the building constructed upon it, but the ground lessor can often maintain consent rights over the method and the aesthetics of any new construction, limit the way the building is used, and have the right to consent to any sale.

Sale-leaseback would allow the reverse of the ground lease structure: the college or university can continue to occupy the property while monetizing the value of ownership. In a sale-leaseback, the institution sells the property to a third party, resulting in a cash payment to the institution. The institution then leases the property back from the new owner.

9. PRIVATE PUBLIC PARTNERSHIPS (P3s):  In 1999, Emmanuel College, a small Catholic liberal arts college in Boston’s Fenway neighborhood, had fewer than 500 students, a dwindling endowment and none of the amenities that attracted students to bigger universities in the Boston college market, but the president, Sister Anne, brokered a deal.

The 17-acre campus located near top hospitals Dana-Farber Cancer Institute, Boston Children’s Hospital and Brigham and Women’s Hospital, partnered with Merck, one of the world’s largest pharmaceutical companies, which signed a 75-year ground lease with the college in 2000 for $50M to build a 300K lab building on an acre of campus.

The school’s Merck partnership has boosted the college’s profile as an institute for scientific research, and Emmanuel’s endowment has grown from around $7M in 2000 to $136.6M today. Brigham and Women’s also signed a long-term ground lease for a different parcel on the Emmanuel campus, where it has plans for a medical research facility.

10. COMMUNITY PARTNERSHIPS: Universities can leverage public-private partnerships to expand beyond the boundaries of the campus to relieve space constraints as well as facilitate collaboration with allied institutions.

Many institutions are initiating partnerships and collaborations to improve students’ postgraduate outcomes, to create new academic disciplines and certification programs, to ensure the relevance and currency of existing programs, and to help local employers and communities thrive. These partnerships often entail technology support and can also help the institution implement advanced technologies.

The most effective management strategy is a combination of all of the above possibilities. With thorough analysis leading to sound decisions, a financially challenged college or university can minimize the threat of reaching into an endowment to cover expenses or, worse, looking instead to the campus under its feet.

Colleges and universities can survive and thrive without relinquishing their identities and physical presence.

Planning Plus‘ Joanne Pizzo specializes in educational facilities, examining what steps schools can take with their physical plants to alleviate stress.