How can academic institutions and private sector partners collaborate to spur development in a challenging economy?
Experts from ULI’s University Development and Innovation Council speak about the challenges for academic institutions in navigating the current economic environment; best practices for partnering with developers and engaging with communities; strategies for providing housing for students, faculty, and staff; and other related trends.
How are academic institutions dealing with building in this economic environment?
Steve Condrin: It’s a difficult time right now to make projects financially feasible, whether you’re internally financing or whether you’re relying on external financing or capital partners. That is going to slow the pace of development. At Washington University in St. Louis, we look at development with a longer-range view than some of our private developer friends, but we’re all faced with inflationary times and rising interest rates. The costs of building and delivering projects simultaneously are at an all-time high. We are looking at every way we can to make them financially feasible, even when rents and income streams aren’t keeping pace.
Herman Bulls: It’s very challenging. The amount of financial support that state governments are providing to state colleges is diminishing every year. Many private academic institutions, particularly small liberal arts institutions, are also facing economic difficulties. Some will not survive. Universities with large endowments may have a backstop with additional sources of funds. However, many HBCUs [historically black colleges and universities], for example, are more challenged, due to a record of receiving less funding and small endowments. When rating agencies and financial institutions underwrite a real estate project, they look at the economic health of the surrounding market, the financial health of the institution, and the cash flow projections anticipated from the project. With those criteria, the rich institutions are going to get richer, the poor poorer.
Kevin Kirby: The best universities have figured out how to keep their classrooms in use [during] as many hours of the day as they can, so they don’t have to build more classrooms. Also, some research facilities have extremely high activity, and others have low use. Universities have to do a significantly better job of using existing space more effectively because they can’t afford to build. The escalation of construction costs these days is huge.
Sara Lu: A lot of academic institutions have the opportunity to create some stability in a down market [by] providing a sustained flow for development firms when the capital market is not fluid. We have different capital and financing solutions than [do] conventional real estate developers or partners. I’m excited about the years ahead, where we may have opportunities to work on new product types or [to] partner with developers who otherwise may not work on university projects. Privately developed projects that have not yet secured financing or broken ground and that are being shelved might provide an opportunity for us to be in the driver’s seat, helping some of these projects across the finish line, especially in the area of housing.
What do you recommend for universities and colleges partnering with private developers?
Jaime Flaherty: Universities can successfully partner with developers when they have a clear understanding of their programmatic needs and the ability to contribute to—and participate in—projects with … land, equity, or lease commitments. Engaging with developers on revenue-generating auxiliary uses, such as residential, commercial, and research, allows institutions to benefit from developer expertise, operational efficiency, and regional/national relationships for mixed-use tenanting.
Lu: Understand your local market, and appropriately allocate risks, controls, and profit and loss. Consider: What are you trying to control? What risks are you willing to allocate and how? We’ve seen partnerships that are completely [at] arm’s length, and we’ve seen ones in which, ultimately, the university assumed all control. It depends on how vibrant the market is and how much competition there is. The real estate market in our immediate vicinity, whether it’s office or residential, is largely driven by Emory, the health system, and the Centers for Disease Control and Prevention. So, if we want something to happen in our immediate submarket, we have to drive that change.
Condrin: Universities and colleges may enter into joint ventures and equity participations, but a ground-lease relationship is the most common, with the university as a ground lessor and the developer/operator as the ground lessee. Aligning goals and keeping them aligned is always the critical piece. On the developer side, if they’re taking on the risk, the decision-making needs to make economic sense [for them]. The university might have more mission-related objectives, each of which has great importance. When the institution’s [goals] and the developer’s goals diverge, public/private partnership projects may not advance all the way to completion, especially in a capital-constrained market.
Kirby: Over the last 20 years, universities have generally had access to low-cost capital. They believe they can execute just as well as a developer. So why do they need somebody else to do that? Going forward, however, the environment is very different. Universities’ balance sheets are full these days. The cost of capital has gone up dramatically. In addition, students and faculty want to participate in the innovation economy. To have the right programming and spaces to accommodate that [desire] is difficult. You need specialized expertise. So, over the next 10 years, universities will be motivated to enter into more public/private partnerships to create the kinds of innovation environments they need.
Bulls: The important thing for university officials to understand is that everybody needs to benefit from the deal. It’s a balancing act between making sure that the developer is appropriately motivated and making sure that the university is getting a good deal.
How should academic institutions be engaging with communities?
Lu: It’s important to establish a regular cadence to engage with your local community, and not just engage when there is an ask. At Emory, we have representatives who communicate with our local jurisdictions, regularly briefing neighborhood associations and our immediate constituents, whether we do or don’t have projects. It’s important to establish trust so you can have advocates in your community when you do have larger projects, and community inputs are very valuable.
Bulls: Town-gown relations are critically important. Some universities, particularly older ones, are in lower-income or minority communities that have been in the process of gentrification. It’s important for developers as well as institutions to make sure that, when they engage with the community, they have a diverse team with people [who] look like residents in the community. Without careful planning, it can become an us-versus-them situation with the neighborhood.
Condrin: I can’t stress enough how critical it is to have a relationship with the communities around your campus before, during, and after development projects. At Washington University in St. Louis, we try to immerse ourselves in the neighborhoods, both to understand their concerns and [to] try to mitigate [those concerns], and also to get a sense of what the community wants and where that overlaps with the university’s development objectives. During the lead-up to a development project, I am a firm believer that the project only gets better the more community input you can solicit.
Flaherty: Engaging with communities during the planning stages, especially for campus edge developments, is essential for building positive relationships, addressing concerns, and creating projects that benefit both the academic institution and the local residents. We have worked on successful strategies that range from project-specific engagement, such as community workshops, to advisory boards that seek input on key project decisions [or] to fully committed and sustained partnerships that transcend an individual project. These types of community/university partnerships are typically separate entities that coalesce around a common vision and goals for the community. Both sides have seats on the board and hire staff to manage mutually beneficial programmatic initiatives. This construct builds trust within the community and provides a regular forum to discuss key issues, including new developments.
Kirby: The most successful innovation districts are vibrant places to live, with retail, art, and programming. This is becoming even more essential coming out of COVID, because it’s hard to get people to come into the workplace now. Universities can create an environment where the most talented people want to be because it’s fun and productive, and that will attract other people, companies, recruiters, and collaborators.
How can institutions address housing shortages for students, faculty, and staff?
Kirby: Third-party providers have built housing economically and efficiently in and around college campuses for some time. But because the college-age population is decreasing in the United States, no one wants to overbuild student housing. Recruiting faculty members—it’s a hypercompetitive market, so, in places like New York City, universities often have to provide faculty members with some kind of housing, a subsidy, or loans, because the costs are so high.
Bulls: There was an area of Philadelphia that had become dilapidated over the years. Judith Rodin, then president of the University of Pennsylvania, and John Fry, then the executive vice president at Penn and now the president of Drexel University, worked closely to put together a program to address housing. The university would provide a loan to faculty and staff who bought homes in these neighborhoods that needed reworking, and if they improved the home over a certain period, the university would forgive the loan. They also [developed a program] to help make the mortgages more accessible, as well.
Flaherty: In supply-constrained markets, we have seen institutions creatively address immediate housing shortages by master leasing hotels, adaptively reusing existing properties close to campus, and establishing housing cooperatives. Longer-term approaches require an increase in supply. For land-rich institutions, this could mean ground leasing or joint venturing with third-party developers to build specific housing types or acquiring existing market-rate residential properties to dedicate to the university community. In addition, with the oversupply of university office space, due to remote work and a shift towards hoteling, there is an opportunity to convert floors or full buildings to apartment units.
Condrin: Motivations for academic institutions to provide housing may vary. It’s not always about affordability. It may just be about creating community. In either case, the university needs to assess what its priorities are and assess the impact of not providing quality, reasonably priced, accessible housing to the campus community. Attracting and retaining not only students but also quality faculty and staff by providing attractive housing … that has a price tag. Many universities are using land leases to create new developments, sometimes in combination with mortgage origination programs, to help faculty and staff afford housing in their communities.
Lu: At Emory, we’re taking a portfolio approach. We currently are in the process of developing a two-phase, 1,000-bed graduate student housing project that we initially thought would be closer to a more conventional public/private partnership. But as we considered the allocation of risk control and profit and loss, the university decided to be the investor. We have a developer partner for the delivery, but it’s ultimately a university-owned project that will be operated by a third party. We’re also looking at potentially converting some established assets into graduate student housing.
RON NYREN is a San Francisco-based architecture and urban design writer.
