THE NEWS COMING OUT OF higher education these days can seem like an endless stream of updates on shrinking endowments, rising tuition costs, and across-the-board budget cuts. The recession is hitting higher education hard; it seems no one is being spared.
So it might seem counterintuitive to think about investing in growth acquiring property, expanding your campus footprint, upgrading facilities or making other real estate changes at a time such as this. But the truth is, when it comes to real estate, the recession is creating excellent opportunities to create long-term value for colleges and universities.
The current economic climate is producing a new real estate landscape for much of the country. Vacancy rates for commercial space—which can be suitable for classrooms and student programs as well as administrative and other functions at urban campuses are high in most cities across the country, and landlords are willing to make concessions that were unheard of just a few years ago in order to execute deals. Rents and sales prices are also falling, in some markets by as much as 50 percent. For higher ed leaders who are thinking strategically, this all adds up to opportunities to meet existing and future needs.
Recessionary times also create demand for new university space. Historically, when the job market tightens and unemployment is high, more and more professionals take the opportunity to go back to school. Likewise, college graduates are more likely to put off entering the job market until conditions improve, choosing instead to go straight to graduate school rather than delay an advanced degree while gaining work experience. During the recession of 2001-2002, some top university law and business programs saw their applicant pools increase by as much as 90 percent as laid-off workers attempted to ride out the recession in graduate school.
What’s more, the demands of a top-notch university setting are greater than ever before. If students are accustomed to Olympic-caliber sports facilities and state-of-the-art research laboratories, then aging and outdated buildings become more of a drawback than ever before. These factors suggest that institutions will need more and more technically complex spaces.
Even without factoring in expanding matriculation and complex technology, it is practically a guarantee that at some point in the future every institution will need to find new space to keep operations running. Buildings will either become outdated or need tremendous work to continue functioning, or the campus will simply run out of space for all that a modern university needs to do. Whether it’s a plan to own or rent, this is the time to consider strategic decisions that will add value to operations in the long run.
Too often, we put off dealing with the inevitable until it is too late in the process. It is all too common for universities to face an immediate need to find a new location for a student organization or a site for a new dorm. By the time that happens, time constraints and the increasing pressure of the situation make it impossible to achieve optimal value. It is important to realize that reconfiguring spaces, moving locations, or starting a new project take time.
Capturing value during an economic downturn requires institutional leaders to think strategically about needs, goals, and physical space. When devising a strategic plan:
- View facilities as part of an overall business plan. Universities do well when their leaders consider property and space as part of the institution’s investment choices, considering all options as opposed to conducting a desperate search for space when needs are already pressing.
- Be proactive. Finding a real estate solution, whether through leasing, purchasing, or constructing from the ground up, is a complex and time-consuming process. It is not uncommon for projects to take a year or more. When campus leaders wait until their facilities are overcrowded or even obsolete, they are seldom able to create a physically or financially optimal solution. Being proactive creates value.
- Weigh all options objectively. Avoid the tendency to favor connections and familiar alliances, and consider carefully the full range of what the market has to offer. A down market, specifically in real estate, means more competitive options can be found, translating into greater value.
- Be flexible and think creatively. Perhaps the institution needs new dorms on campus but an off-campus building in the city’s business district was recently donated to the school. Consider moving administrative offices to the building in the business district and renovating the now-vacant space on campus for the new dorms. There are ways to stretch in different directions and still adhere to the organization’s mission and goals.
- Identify true needs and goals. When was the last time you conducted a space needs assessment study using carefully collected data and maintaining a sharp focus on the university’s mission and goals? Perhaps mission and goals need to be restated or reclarified. Understanding these components clearly will help set priorities and add value by making hard decisions about facilities easier.
- Avoid the pitfalls and hidden costs of the leasing and acquisition market. Commercial leases in competitive markets are notoriously complicated, filled with fine print that can confound even the savviest of real estate attorneys. A reputable real estate consultant—preferably one who deals exclusively with tenants or buyers—can decipher hidden meanings and costs.
In this down economy, investing in real estate should be viewed as both essential and practical. We may never again see a time like this when costs are so low and space availability so broad. At the same time, universities have the need and obligation to serve a growing number of applicants and to adapt to increasingly complex campus demands.
This is an opportune time to add value through strategic choices about real estate. Years from now, you will be thankful that you did.
Marisa Manley is president and founder of Commercial Tenant Real Estate Representation (www.ctrr.net), a real estate advising firm that works with colleges and universities on leasing, acquisition, and construction.