Even as U.S. colleges and universities contend with the pandemic, a recession and flexible educational programming—virtual vs. live instruction or a hybrid model—student housing is still viewed by many real estate investors as the most steadfast and resilient sector. According to CBRE, the highest level of student housing investment interest is for properties at Tier 1, Power 5 conference universities. That covers a large swath of U.S. cities and regions.
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Still, as the world waits for a COVID-19 vaccine, new real estate investment models that impact U.S. colleges and universities are emerging. One creative idea being floated is for real estate owners and investors to approach universities to purchase or sublease spaces that are now vacant due to declining enrollment numbers.
Could these spaces be transformed into suburban satellite offices for companies that will require additional space to ensure social distancing for their employees when they return to work in the office? According to industry watchers, we might see formerly university-owned properties repurposed in unusual ways in a post-pandemic era.
Leasing real estate from higher education
Currently, for those interested in subleasing college or university space, a quick online search reveals that some schools are eager to deal and are already set up to do so. For example, the University of Minnesota published its guidelines for “Use and Lease of University Real Estate by Non-University Entities.” Whenever possible, the university uses standard lease agreement forms that are available on its Office of General Counsel Standard Contract Library website.
The University of Minnesota leasing manager negotiates the terms of the lease agreement in consultation with the office of general counsel on legal issues, as well as the office of risk management and insurance on types and amount of insurance to be required. The dean and department head must also approve the use of the space by the non-university tenant.
Charges for the use of university real estate are set by the real estate office, in consultation with the appropriate university departments, using market comparisons. Security deposits equal to the first month’s rent are typically required and paid prior to the execution of the lease and occupancy by the tenant.
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Each educational institution will have its own guidelines, but most would agree that certain areas are not on the table. According to Jaclyn Fitts, executive vice president who leads the student housing team for capital markets at CBRE, on-campus student housing apartments are generally not available for sale. “It is very rare for universities to dispose of their owned (student housing) properties as the oldest housing facilities are typically located on core campus real estate,” Fitts said. “When these buildings become functionally obsolete for housing purposes, it is more common for the buildings to be scraped and new facilities—likely for teaching facilities—built in their place,” she explained, adding that new construction of life science/technology lab space on campus has been on the rise.
Ramping up liquidity
Universities and colleges were facing a declining number of college-age students even before COVID-19—and, demographically, the trend will continue heading in the wrong direction, according to Jeff Hubbard, senior managing director, structured real estate sales division, A&G Real Estate Partners. “The pandemic has put gasoline on the situation,” he said—but this spells possibility when it comes to investing in student housing.
“In an urban environment like New York, there’s going to be a tremendous opportunity that will arise from the disruption in the marketplace. But there are going to be real estate opportunities nationwide because this is a nationwide issue,” Hubbard noted.
He encourages decision-makers at U.S. colleges and universities to take a page from commercial real estate and turnaround management. For example, aggressively engaging with landlords to renegotiate leases could lower schools’ rental payments. This could involve subleasing deals as well: “The university could respond to the rising need for affordable housing by subleasing an off-campus student housing development that, due to declining enrollment, is no longer needed.”
Additionally, sale-leasebacks of university-owned properties offer a way for schools to raise cash by selling mission-critical properties and then leasing them back, while retaining their use. “These deals are particularly doable for buildings in big cities, where private equity firms and other real estate investors are forever on the lookout for long-term acquisition opportunities,” Hubbard explained.
Investors should look for schools that may need to raise cash under tight time frames. Structured sales of non-core real estate assets provide certainty around when real estate transactions will occur, because bidders agree to the sale terms and due diligence items upfront. “Structured sales can boost bidders’ confidence and lead to a better sale price,” Hubbard noted. “These accelerated transactions generally result in all-cash offers within 60 to 75 days.”
Hubbard recently sold a couple of colleges with closed campuses in the New York metro area. In both cases, Hubbard’s team was approached by investors with a variety of interests in terms of repurposing the campuses. “Besides educational buyers, we also saw senior housing and multifamily buyers, and we saw companies that wanted to create a work campus,” he noted.
Expect more P3 investments
This year, Gilbane Development Co. has completed four off-campus properties, all of which have met leasing goals. “Universities will have on-campus challenges regarding existing housing that they will not be able to deal with—like deferred maintenance and demand for single rooms—because of budget issues,” said Jeffrey Resetco, senior development director, Gilbane Development Co., adding that P3 investments will probably become more prevalent in the coming years.
Real estate developers who work with universities—as well as the consultants who advise them—have continued to work with these clients throughout the pandemic. Once the initial challenges of starting the fall semester will have been overcome, Resetco expects universities will start to focus on longer term budget mitigation. “The companies who are focused on solving these challenges will help create public-private partnerships that deliver real value and high-quality developments for campuses,” he concluded.