Colleges Lean More on Commercial Real Estate Investment

Change has consumed college campuses in recent years — and not just over policies, protests and personnel. 

A confluence of institutional challenges has spurred design and development at the nation’s universities and colleges. These challenges include competition for students, the spread of satellite campuses, a long-term demographic shift that’s leading to an enrollment cliff, fresh sustainability commitments, and a challenging financing environment, including pullbacks in both federal and state funding. 

As these public and private institutions try to weather this financial storm, they’re increasingly looking at partnerships with for-profit developers as a solution. Considering the funding and deferred maintenance challenges schools face, many argue the quickest way to add vibrancy, retail options and amenities to a campus might be to partner with someone who can build them for you.

Many schools have looked at leasing out space to developers, or have invited them to build directly on campus. This is especially true of hotel developers. Texas Tech is planning a 250-room campus hotel near the busy corridor between Austin and San Antonio; Michigan State University wants to add an arena and hotel to host events; and Hilton recently acquired Graduate Hotels, which specializes in on-campus development, with plans to expand the brand from 40 to 400 locations. 

Much of this is due to a simple reality. Universities may be stuck with budget shortfalls — state funding per student nationally didn’t return to pre pre-2008 Global Financial Crisis levels until 2022, and that was due in part to one-time COVID relief infusions. But what colleges do tend to have in spades is land, which schools often want to monetize but not sell. Partnerships with developers help them add to their campus without committing their own capital, allowing them to borrow more and maintain great credit.

The pandemic and rising interest rates slowed the development pipeline, said David M. Carlos, vice chairman of brokerage JLL (JLL)’s Nonprofit, Education & Government Practice. But, now, colleges feel more stable, have their operations shored up, and feel secure enough to start on larger projects. Besides, school leaders are used to thinking long term.   

“Schools are in the forever business,” said Nina Farrell, vice president of educational and institutional real estate for JLL. “They’re not interested in letting go of land, because in 100 years they might expand.”

Typically, colleges and universities think of their real estate in one of two ways, said Lindsay Stowell, JLL’s executive vice president for higher education. The first route — typically mixed-use projects — focuses on developing existing land adjacent to or on the outskirts of a campus. This route aims at increasing value and generating revenue. Think commercial space, retail or hotels. 

Arizona State University sought greater revenue streams after the Great Recession, and found that it controlled 300 prime acres near Downtown Tempe that had never been developed or were set to become a golf course. It’s now home to an innovation corridor, senior housing, a new stadium and commercial spaces.

The other main option is connecting with a development partner to use its capital and expertise to turn land owned by the institution into something the school needs: more affordable student housing, or perhaps labs or research facilities. The University of Colorado at Boulder, Florida Gulf Coast University, the University of Utah and Vermont’s Middlebury College have launched projects to develop new student and faculty housing, helping professors and teachers weather the housing crisis, much like some urban school districts have done with elementary school teachers. 

Development volume with colleges remains relatively high, Stowell said, despite higher interest rates and a challenging construction environment. That’s in part because college collaborations open up different financing options. Schools can tap into tax-exempt bond financing or school funding for certain projects, especially housing. Purdue University in Indiana just closed a $28 million student housing deal on its Indianapolis campus for 427 beds utilizing one of these options, auxiliary funds.

“There were solutions to finance those housing projects with developer debt and equity, and now there’s a lot more tax-exempt financing solutions being done, because it’s still the lowest cost of capital of all the options out there,” said Stowell.  

Private developers also like stability. With college partnerships, they get into their own forever business combining long-term leases with long-term demand, whether it’s from students sleeping in new housing units, visitors staying in campus hotels, or everyone using retail or other commercial spaces. 

Many schools seek more than just housing and hotels. A number of larger projects focus on developing bigger, multi-use projects, including lab and R&D space via specialized real estate investment trusts or biotech-focused developers such as Alexandria Real Estate Equities and Wexford Science + Technology. Tishman Speyer was named master developer for Hazelwood Green, a 178-acre research and biomanufacturing site and former steel mill that will include new facilities for Pittsburgh’s Carnegie Mellon University. 

In New York City, the demolition of a Hunter College campus in Midtown is set to make way for a 2 million-square-foot life sciences hub. The city’s Economic Development Corporation is searching for a private developer as a partner, and the city and New York State are putting money behind it. 

The increasing complexity also brings in more public dollars from cities — $1.6 billion, in the case of the Hunter College project — as well as potential headaches. In Lawrence, Kan., the University of Kansas’ $450 million Gateway Project, a multi-use expansion near its football field, has been partially delayed due to trouble nailing down a partner to develop a proposed hotel. That delay may jeopardize state funding tied to the ability of the project to host conventions.

“As time goes on, it’s just becoming more and more challenging for a college or university, given the dollars and in-house expertise needed, to do projects like this, so you’re going to be seeing a lot more partnerships,” said JLL’s Carlos.

That kind of multiplayer funding and collaboration is taking off in the Midwest. In February, Iowa State University announced that Goldenrod Companies, responsible for more than $4.4 billion in commercial development and numerous collegiate developments, would be the lead partner on the CYTown project, a 40-acre mixed-use district on university land set to include medical and hospitality space as well as housing. And, in Columbus, Ohio, the 270-acre Carmenton tech campus, a multidisciplinary research hub, is being developed by Ohio State University and Tishman Speyer on OSU land, with the assistance of the state’s economic development corporation and the City of Columbus.

“We look forward to working with the university, SciTech (an OSU-affiliated nonprofit) and the local community to produce a collective vision for a vibrant, welcoming and authentic neighborhood,” Tishman Speyer CEO Rob Speyer said in a statement. (The firm declined to comment further.) 

Like many of the nation’s 100 land grant universities, which benefited from 19th century federal legislation to offer land to help improve and modernize higher education, Ohio State has a significant portfolio of underutilized real estate. It’s so big, in fact, that the school has its own development arm called Campus Partners that helps oversee these projects. 

That stands in stark contrast to smaller campuses that find themselves in financial trouble, said Christian Koulichkov, a managing director at A&G Real Estate Partners who specializes in adaptive reuse projects of campus properties. Some campuses can be so small that carving off small chunks of property can devalue the campus. 

The raft of developments, then, has further separated collegiate winners and losers, as enrollment and other issues begin to force more institutions to close. Those with prime locations, or the kind of endowments and flexibility to expand and build satellite campuses in such locations — Vanderbilt this summer announced plans to build a graduate campus in West Palm Beach, Fla. — have been pulling away from schools with poor locations, dwindling student populations, and small real estate holdings that simply don’t present the scale that excites investors. 

As Koulichkov said, there’s a difference between schools where alumni are, say, public servants, versus schools that produce titans of industries who can drop $50 million to endow a new development.

“Those who are thriving are really thriving,” said JLL’s Stowell. “And those who are struggling are really struggling. There are just basic real estate fundamentals that drive this as well.”