3 takeaways on real estate development from large, urban universities

Expert Insight

3 takeaways on real estate development from large, urban universities

EAB works with a wide variety of colleges and universities, most of whom possess significant real estate holdings. While these holdings run the gamut from the current campus footprint to assets that extend into the neighboring community, institutions recognize that a more active real estate strategy may help address recent trends, including:

  • Falling numbers of traditional age students in many regions leading to declining enrollments on many campuses (and therefore excess capacity)
  • Desire for better amenities for students, faculty, and staff in the neighborhoods directly adjacent to campus
  • Declining public funding for higher education creating pressure on universities to generate revenues from other sources
  • Rising real estate values in urban areas forcing institutions to play a more intentional role in urban redevelopment to protect affordability for students and community members
  • Growing opportunities to partner with corporations or community groups for applied research, innovation, and experiential learning

EAB interviewed several large, urban universities across North America to better understand their real estate strategies—and the impact more active management has on institutional priorities. Read on to learn the three main takeaways from those conversations.

1. Smart growth—not profit generation—is the primary goal

While profit generation is important given both the reality of budgetary constraints and the scale of real estate holdings, business and facilities executives report it must take a back seat to other goals. Specifically, the first goal of more active real estate management is to protect and extend institutional ownership of land around campus. The Square 54 development at George Washington University is now referred to as the “front door” of the campus, for example.

The second goal is to create facilities that enhance the quality of life for students, faculty, staff, and local community. As one senior Facilities officer put it, “we are focused on creating a great environment for students, faculty, and the campus community. Revenue is important, but it is a ‘nice to have’ relative to development of community.”

It’s also critical to note that real estate development is not an easy or reliable revenue stream. In fact, one Facilities executive called out that it put his university “at the whims of the larger real estate market.” So while a small number of large colleges and universities have generated tens to hundreds of millions of dollars in revenue, they had to invest significant capital and time on the front end. And most saw little to no profit across early years. Several leaders specifically called out research and innovation parks as prime examples of putting mission over margin. While they reinforce broader goals of greater engagement with the community and industry writ large, they typically do not generate significant revenues.

2. Development decisions must focus on quality over revenue

Beyond governing real estate development in general, business and facilities leaders say that specific decisions must be governed by principle rather than profit. This applies to the leasing of retail space in mixed use developments—beyond restricting space use, such as making leasable space tobacco free or restricting certain undesirable businesses from moving in, leaders describe a curation of space to achieve community-centric, engaging environments.

Campus leaders must keep the local community in mind as well. Engaging the community doesn’t always avoid pushback—one vice president described how the local leaders resisted development even when the president and CEO of the trust took the time to consult with and build relationships with representatives. Ultimately, the university had to come to agreement on community concerns such as traffic, parking, and the height of new buildings. However, others have seen success—the West Campus Development Trust received a New Community Development award for its “people-first” design at the University of Calgary.

3. Real estate transactions are complicated and require external support

While institutions take on a significant volume of new construction, few have truly tackled real estate development. These transactions can be financially, legally, and politically complicated and create significant risk potential. Because institutions often lack the internal expertise to manage these transactions, interviewed leaders recommend working with industry experts.

Tapping external expertise takes a few forms. For many institutions in Canada, it means the creation of a real estate trust with a dedicated board of directors, including real estate experts—though these board members must be restricted from having an active stake in development. Trusts have the advantage of accelerating decision-making and enabling institutions to borrow money externally. (Some campuses use their endowment to invest in real estate holdings.) Leaders also point to partnering with developers that have significant public sector experience.

Deal structures can run the gamut, but always prioritize ground leases over the sale of land. Most institutions opt for 99-year ground leases to developers, but one institution has leased tracts of lands for 33-year terms because they expect they will need the space back sooner.

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