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A Prime Investment

Developers are turning commercial real estate into institutional student housing
University Business, Apr 2009

Current college enrollment statistics have reached record-breaking levels, thanks to the approximately 4.2 million echo boomers who enter institutions of higher education every year. Fully 78 million strong, echo boomers are the children of the baby boomer generation, born between 1982 and 1995, according to U.S. Census Bureau statistics.

With enrollments expected to soar 11 percent between 2003 and 2013, echo boomers will be the most highly educated demographic ever. Since 1990 was the banner year for echo boomer births, this fall’s incoming freshman class is destined to be the largest ever, (US Census Bureau, and New York Times, This fact creates a strong demand for additional student housing at universities nationwide.


Echo boomers are the first generation raised with high-speed internet, 500-channel LCD TVs, cell phones, iPods, Blackberrys, the Wii, and more. They demand an updated infrastructure whose backbone supports the sophisticated electronics that have become essential to their lives. These students also want to live somewhere hip, fun, and out-of-the-ordinary—certainly not in the cramped dorms of their parents’ generation. They expect to have their own bedroom and bathroom, enough space to spread out, comfortable furniture, upscale finishes, and some measure of privacy.


Literally, all higher ed institutions face endless budget constraints that wreak havoc on demands for costly new facilities. Because colleges must invest in educational resources, many are constructing less on-campus housing because the funding simply does not exist. In some cases, university officials actively encourage older students to find off-campus apartments so that there are enough dormitory beds to accommodate incoming freshmen.

Similarly, student residences are exceptionally expensive to develop. A far-reaching plan to develop new dorms and apartments on the University of Washington’s Seattle campus — enough to house 3,000 students — will cost the university an estimated $850 million. Under the plan, the university would renovate six of the seven 1970s-vintage residence halls, while demolishing the seventh building. Increasing student-housing fees and borrowing the money on a 30-year basis would finance the plan.

The current U.S. student-housing market is valued at about $160 billion, attracting developers, investors, and owners. This sector is virtually recession-proof. Echo boomers tend to stay in school. During difficult financial times, degrees are especially valuable. Since the market demand for student housing is somewhat less cyclical in nature than office or industrial real estate, investing in it represents a shrewd strategic direction for owners. How can real estate developers help financially stressed universities satisfy these students in a cost-effective and successful way?

Demographic, sociological, and economic factors currently are apt for commercial real estate developers and investors to put roofs over students’ heads. Private-sector real estate developers recognize this need and diversify their portfolios by developing institutional-grade student residences in prime locations.

A few developers began moving into this market during the late 1990s when college enrollment began increasing appreciably. Today, there are several real estate investment trusts (REITs) dedicated exclusively to investing in and developing student housing. More developers are entering this market as a proactive response to the slowdown in the office and industrial sectors.

Some developers choose to partner with schools to build on-campus dorms that accommodate growing student populations, while others prefer to develop off-campus housing with more amenities in common with rental apartments. These multi-use residences are structured similarly to mini villages—a 24/7 environment that functions as a community.

Per-unit rents for student housing are usually somewhat higher than for conventional apartments. They are more densely populated and leased by bed rather than as an individual unit. Typically, student housing also requires a higher level of management services because of the heavy turnover rates. As a result, management companies that specialize in student-housing facilities provide an enhanced level of expertise.

Chicago’s downtown is home to some 30 higher ed institutions with a combined enrollment of more than 92,000 students. Although many of these students are daily commuters, there are others who prefer to live in a university-centered environment.

As a result of severely limited university-owned options, private developers have embraced this niche market. The Alter Group’s current student-residence project is the $45 million transformation of eight floors of the historic Pittsfield Building, into Fornelli Hall, a 450-bed student-housing project that occupies floors 13 through 21 in the 38-story landmark.

The Pittsfield Building was briefly Chicago’s tallest building, when it was completed in 1927, and incorporates Art Deco and Gothic Revival architectural elements. The building, which is primarily occupied by small businesses, has soaring multi-story public spaces that are virtually unchanged since their completion more than 80 years ago.

Roosevelt University and Robert Morris College (Ill.) officials have signed master ground leases for 350 beds on seven floors within Fornelli Hall. A single floor that can accommodate up to 100 beds is still available. The schools’ proprietary housing offices will lease their beds to students. The Alter Group is leasing the remaining beds through our own in-house resources.

When we first learned of the Fornelli Hall opportunity, we analyzed the market to determine possible uses for our space and interviewed university officials to determine their level of interest in additional residential space.

Fornelli Hall was a gut-rehabilitation project—a major renovation where ripped out old walls were ripped out to completely reconfigure the space. Obsolete mechanical systems were upgraded to serve the new usage.

To deliver Fornelli Hall in time for the start of the fall term, we worked with local contractors who have excellent relationships with subcontractors and materials suppliers in the community. One logical requirement was for heavier-than-normal plumbing capacity to support multiple toilets, bathtubs, sinks and laundry. Not all vintage buildings will work as student residences because of the stringent building infrastructure requirements necessary for conversion.

Ultimately, students will have a variety of options, including studio apartments and larger apartments with living areas, kitchens, bathrooms, and a mix of private and shared bathrooms. Sustainable elements include flooring made of recycled materials; energy-efficient appliances; a recycling system; and an energy-management program coordinated by U.S. Equities, a management firm. The Alter Group uses its own capital to finance Fornelli Hall.

Rather surprisingly, the recession could actually boost college enrollment and the demand for student housing. As more people find themselves out of work, they realize that they need education and training to qualify in a shrinking job pool. Additionally, President Barack Obama has proposed a significant expansion of the government’s role in making college more affordable for more students, following through on a campaign promise to give every child the opportunity to pursue a higher education.

Obama wants to increase the U.S. Department of Education’s discretionary budget to $46.7 billion, a 12.8 percent increase over the long term. The government will save $4 billion a year by ending a long-time government-subsidized college loan program. Rather, they will augment a direct loan program created in 1993 during the Clinton administration. This would make the federal government the sole source of federally supported college loans.

In his budget, Obama wants to link Pell Grant program growth to inflation; it would grow by more than 75 percent over the next 10 years. According to a comment by Education Secretary Arne Duncan, “Our basic thought is, rather than continue to subsidize banks, we want to help dramatically more students get more access to more aid.”

This is likely to increase demand for projects like Fornelli Hall, because of its position in a market that has many students and very little competitive student housing. At Chicago’s Columbia College, for example, music school applications alone are up a startling 37 percent for the 2009-2010 school year. Despite economic malaise, rising unemployment and the stock market slide, students are staying in college. Even better, their parents are willing to pay for it. With downtown Chicago the home to more than 52,000 college students, demand for beds is strong and likely to remain so in the future.

Urban areas are likely to see the development of additional Fornelli Hall-type student residences as older buildings receive a second purpose. If the downtown student population continues its strong growth trajectory, the demand for mixed-use environment university residences will be greater than ever.

Fornelli Hall is a prototype for how urban student housing will function in the coming years. A 24/7 residential community, amenities will include an executive-level health club, student-lounge areas that are ideal for study, free Wi-Fi throughout the building, and laundry facilities on every floor.

At Roosevelt University, traditionally thought of as a commuter school, greater numbers of its students are choosing to live near their Chicago campus. In the last three years, the number of Roosevelt students living in on-campus housing facilities has increased by 36 percent, according to their student housing office. The school is expecting more students to make Chicago their home, accommodated by residences like Fornelli Hall and designed specifically for upper-level students.

Matthew A. Ward is a senior vice president of The Alter Group, based in Skokie, Ill., a national corporate real estate developer with the private capital necessary to fund, develop and manage student housing, commercial, healthcare and industrial properties. E-mail