Mr. Frink is based in our Chicago office.
Although the consensus is that real estate will continue to suffer a persistent downturn, one area that remains a bright spot is higher education. Despite being in a recession, and partly because of it, enrollments at colleges, universities and trade schools across the United States are growing. Those looking for work and unable to find it, and those who lost their jobs, or feel that they might lose their jobs or will not be eligible for promotions because of the economy, may believe that now is a good time to go to college or a graduate, professional or vocational school and earn a degree or certificate. Students now entering a two-, three- or four-year program must certainly hope that jobs will be more plentiful when they graduate.
The other factor that is contributing to this record enrollment is the so-called "echo boom." The number of "baby boomers" having children reached its high point about 18 years ago, which means that the number of high school seniors is peaking this school year, producing an estimated 3.2 million high school graduates in the spring of 2009, many of whom will then be attending institutions of higher learning. Some colleges and universities were apparently caught off guard this year, with freshman enrollment in 2008 increasing by 10 percent, 20 percent or more at some schools. This has forced some colleges and universities to come up with alternative temporary arrangements, including securing hotel rooms for the housing needs of some of their students. For so-called "commuter schools" – institutions that traditionally have had a high percentage of students who commute to class from home – demand for student housing is also being fueled by higher transportation costs, which make the comparative cost of living at home and commuting to school less attractive.
The credit crisis has created uncertainty in the student loan market that may affect the ability of some students to afford college or graduate, professional or vocational school. In addition, endowment investments have lost considerable amounts of money in the last year and budgets have been cut, especially at public institutions. It remains to be seen how this will affect enrollments in 2009, especially the fall semester, but many schools are assuming that the growth in enrollment will continue.
Dormitories Require Special Planning
As a result of the factors discussed above, post-secondary schools need more classroom and office space and, especially, dormitories. Planning for these needs is much different than with the normal commercial real estate project. For instance, unlike a typical office space, which is comprised mostly of offices, with some lobby, conference room and ancillary spaces, schools require large spaces for things such as classrooms, libraries and cafeterias. Also, there are a number of different constituencies to satisfy in planning such a project. In addition to the administrative staff, there are the faculty, students, trustees, alumni and contributors to consider, often with differing criteria that must be satisfied.
Similarly, dormitories are not just apartment buildings – they have special requirements and present unique challenges. For instance, the living quarters themselves are communal, requiring two, three and even four individuals to share living space, some with and some without separate bedrooms. The leases or occupancy agreements are slightly different from the usual apartment leases. Because schools are dealing with a population that is younger than in most apartment buildings, dormitories are more management intensive. Weekly inspections by the building management company are not uncommon. Larger security deposits and guarantees by parents are generally required. In addition, shared facilities, such as cafeterias, libraries and lounges, are often necessary, facilities that are not found in typical apartment buildings. Modern dormitories may not be what many remember about their dorm rooms at college. The rooms are wired for Internet, and many of the buildings have wireless access to the Internet. Modern dormitories include gourmet coffee shops, health clubs, maid service and other amenities. Because some of these goods and services are provided by third parties, leases and licenses of concessions must be entered into with these providers. Finally, many of the students are only interested in entering into occupancy agreements for nine months, not including the summer months unless they are year-round students. Since enrollment is down substantially during the summer term, it is often difficult for the student housing owner to achieve full occupancy between the end of the spring semester and the beginning of the fall semester.
In addition, these types of facilities may serve mixed uses, including not just classroom, office and/or dormitory space but also retail establishments with separate ground floor entrances for use by students, faculty and staff, as well as the general public. They can also be shared by more than one school, requiring the coordination of the interests of a number of different institutions.
Liability Issues
Whether owned by the school itself or a third-party developer, there are special concerns regarding security, including sexual harassment issues, and management of the student housing facility. The college or university may be liable for injury or loss suffered by a student at a dormitory, even if it is not owned by the school. There are also multiple relationships that exist between the school and the student. The dorm resident is not only a tenant or occupant of the building, but also a registered and, in most cases, tuition-paying student of the college or university, who may be using student loan funds to finance his or her education. Enforcing legal rights or remedies against a resident who may be in violation of an occupancy agreement or the rules and regulations for the dormitory, such as through an eviction proceeding, obviously impacts the student-school relationship in other ways. These relationships can be especially difficult to coordinate when the institution is not the owner of the dormitory since the owner is primarily concerned with its property, and may not fully take into consideration the other interests that the school may have.
A Range Of Potential Financial Benefits
The development of student housing and other school uses may also provide special tax benefits. For instance, the facility may be exempt from real estate and sales taxes and may qualify for tax credits, depending on the nature of the building, such as historic structures or married student housing. Sometimes, when the entire property is not being used for what would otherwise be a tax-exempt use, it must be subdivided or converted to a condominium form of ownership to take advantage of the exemption.
Viewed as a relatively safe haven during challenging economic times, student housing development is better able to attract investors and lenders than other types of real estate. Also, if the college or university is obtaining the financing, its credit rating, which is based not just on its real estate assets but also its endowment, tuition and other assets, if strong, can attract cheaper dollars. This is especially true if the institution is eligible for tax-exempt financing.
Some developers specialize in student housing, with more trying to get into the business because of the limited choices available in other sectors of the real estate market. Some are trying to convert existing apartment buildings into student housing. Because of the unique nature of student housing and the desire on the part of many institutions to have entire buildings or at least separate entrances dedicated to dormitory use, even if not for the exclusive use of just one school, this is more difficult than it might seem. Location within walking distance of the campus is also important, especially for urban and northern schools, because of security, transportation costs and weather concerns.
No one knows for sure what 2009 holds for the economy but it will certainly be a challenging environment for real estate. Certain indicators point to the fact that times should be relatively good for post-secondary schools. Student housing and other higher education real estate development may not be a boom industry in 2009, but it is likely they will fare better than most other segments of the real estate industry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
