Degrees of Success
Campus-related projects earn high marks from commercial real estate developers.
By Matt Hudgins |
Church Street Plaza, a mixed-use development near Northwestern University in Evanston, Ill., includes a Wolfgang Puck restaurant, which caters to students’ increasingly expensive tastes.
In the past decade, commercial real estate activity in U.S. college and university towns has matured from the old standbys of pizza joints and T-shirt shops to include coffee bars, upscale restaurants, and stores that sell everything from cell phones to shag rugs.
Today’s students wield more disposable income than previous generations, and they demand the living, eating, and shopping options they’ve grown accustomed to at home. For developers and investors, access to thousands of consumers within a university’s small geographic area spells steady business and high rental income.
“A university generates traffic like a big retail anchor,” says Anthony A. Strauss, CCIM, senior retail associate with NAI Welsh in Minneapolis. Strauss is wrapping up a $1 million renovation to a century-old four-building complex near the University of Minnesota’s planned 50,000-seat stadium. Now leased to several restaurants, the space commands nearly double the rent charged before renovation.
The nearby university of 53,000 students and 16,000 employees drives most of the traffic to Strauss’ property. He expects his tenants to receive even more visitors when the adjacent stadium is finished in 2009.
Campus towns surrounding universities and colleges provide interesting niche markets for commercial real estate professionals looking to diversify their portfolios or embark on new business ventures. While the majority of projects involve multifamily and retail development, savvy professionals who understand the changes in demand may find other opportunities that benefit from the old college try.
New Classes of Development
Students’ increasing disposable incomes and spending habits are fueling a transition to higher-end restaurants and retail, experts say. Witness the Wolfgang Puck Grand Café near Northwestern University in Evanston, Ill. The upscale trend is why Chicago-based Tartan Realty Group currently is converting retail and restaurant projects at Indiana University in Bloomington, Ind.
This transition also is altering the look of college towns. Today, coffee shops, bookstores, and restaurants across from campuses feature extensive landscaping, comfortable seating, and wireless Internet hot spots where patrons can socialize and study. In essence, campus-area developers are adapting large-scale retail techniques to encourage extended visits and increased spending.
“A lot of them have outdoor seating, and people gravitate to that,” says Wilhelm O. Kreuzer, CCIM, a Tartan Realty principal. “Those streets are almost like a lifestyle center.”
Tartan Realty has developed retail and mixed-use projects near the University of Illinois at Urbana-Champaign campus, Illinois State University in Normal, Ill., and North Carolina State University in Raleigh, N.C. “It’s a pedestrian business, and the tenants do very well,” Kreuzer says. “There’s just a demand when you get density like that [from a college campus] and that brings good sales.”
Multifamily is another area of opportunity. Biola University, a private school of about 5,000 students in La Mirada, Calif., in Los Angeles County, is keenly interested in providing student housing and has purchased seven nearby apartment complexes for conversion to residence halls in recent years, according to Mike Crosby, CCIM, the university’s real estate investment manager. While Biola has its own dormitories, Crosby likes the flexibility of off-campus properties, which can be leased to market renters when students don’t take all the units.
But promising property types for investment near colleges and universities aren’t limited to retail and multifamily. “One of my highest priorities right now is looking for office space,” Crosby says. Without room to grow, Biola is moving administrative units to leased offices to free up on-campus space for operations that require direct contact with students.
Biola’s dilemma is common on constricted campuses such as Indiana University’s. After Tartan Realty added two floors to the former Von Lee Theatre, which expanded the space from 6,700 square feet to 21,000 sf of retail and office, the company leased the entire office portion to the university’s administrative department.
Institutions of higher learning generally develop and own the buildings on their campuses, but niche opportunities exist for private developers, particularly for student housing. Around the country outdated dormitories with bunk beds and communal restrooms and showers are being replaced by high-end units that feature kitchens, private bathrooms, and wiring for cable TV and Internet.
Valdosta, Ga.–based Ambling University Development Group is a fee developer that builds new student housing for schools across the nation. Construction costs vary by market but average a little more than $100 per square foot, according to Charles Perry, AUDG’s president.
“Today’s students and their parents are much more demanding — they are just not going to stay in the old dorms,” Perry says. “The majority of these students are looking for a single-occupant bedroom and a bath they share with no more than one other student. These are class A or higher apartments, but the skins on them look like traditional dorms.”
Large on-campus housing projects often include a mixed-use component, usually restaurants or retail but occasionally administrative offices such as police substations, Perry says. AUDG developed a 10-building housing project for Old Dominion University in Norfolk, Va., that included 50,000 sf of retail, including a fitness center. “The different mix of uses can be all over the board,” he says. “In the last three years, mixed-use has been blending into these projects, and that’s going to be the norm going forward.”
In an unusual on-campus project, Guy Trusty, CCIM, president of Lodging & Hospitality Realty in Coral Gables, Fla., is working with Florida International University to establish a hotel on its North Miami campus that would double as a hands-on teaching facility for its hospitality school. His greatest challenge in three years of on-and-off talks with the university has been getting the developer, school administrators, and faculty to agree on an appropriate size for the hotel, Trusty says.
“The school had the Taj Mahal Hilton in mind while the developer had a Marriott Courtyard in mind,” he says. Slated to serve one of two main campuses for the 38,000-student university, the hotel could achieve a 40 percent base occupancy level with 125 rooms, Trusty believes.
“It’s a slam-dunk idea. If everything were just business, there would be a hotel there already,” Trusty says. “You need to recognize upfront that you’re dealing with non-business people, and you have to understand their perspective. You have to be very patient.”
Barriers and Benefits
Acquiring desirable sites within walking distance of school campuses is a difficult, expensive proposition. The best spots are near businesses that already draw a steady flow of students and visitors to the university, putting sellers in a position to demand high prices.
“Students and visitors want the convenience of walking a block or two blocks, or you don’t command the same attraction,” says Mark L. Levine, CCIM, director and professor at the University of Denver’s School of Real Estate and Construction Management.
Unless the campus is new, most projects involve urban infill, replacing or rehabilitating structures surrounded by existing businesses, which adds layers of complexity and cost. Zoning and building approvals may require negotiations with the college, neighbors, and even historical preservation groups, particularly when developers seek to add density through heights that are uncommon in the community. By the same token, limited availability and a laborious permitting process serve as barriers to entry for competitors.
Parking is often a developer’s greatest challenge near a college or university, Levine says. Developers may be loathe to sacrifice precious land for vehicle spaces, but most retail tenants — and nearby neighborhood associations — will insist on at least a few spaces.
“Nobody wants to spend on a parking space. It’s not unusual to see $30,000 per space near a lot of campuses and it doesn’t produce revenue,” Levine says. “Every time somebody says ‘I want 10 more spaces,’ they’ve just added $200,000 to $400,000 to a project’s cost.”
The right location is essential to enjoy the constant flow of pedestrian traffic colleges generate. Depending on a market’s size, the number of good sites may be limited to a handful, with few or none available for acquisition. It’s tempting to look for properties off the main drag, but experienced developers warn against locating a project outside of students’ habitual stomping grounds.
“If a campus town is two blocks long, the national retailers don’t want to be on the third block,” Kreuzer says. “It’s dramatic how the sales will drop off.”
Even so, some entrepreneurs have ventured outside existing college tho-roughfares with great success by providing the right mix of uses to draw customers to their tenants. A good example is Church Street Plaza, a 7-acre redevelopment project near Northwestern University in the Chicago suburb of Evanston, Ill. Locally based Arthur Hill & Co. is the master developer for the project, which is on land previously owned by Northwestern University and by the city of Evanston, about four blocks from the main campus and a mile from Evanston Hospital.
Church Street Plaza offers an 18-screen movie theater, a 187-room Hilton Garden Inn hotel, 205 residential condominiums, a 170,000-square-foot office building, an art gallery, and several restaurants. Retailers range from Cost Plus World Market and Borders to Urban Outfitters and Blick Art Materials. Rather than rely on foot traffic, the project offers 1,400 free garage parking spaces, financed through a municipal bond issue, and draws customers from the university, hospital, and surrounding trade area.
“University campuses tend to be strong economic engines even when the rest of the economy is slowing down, and hospitals have that characteristic as well,” says Bruce Reid, CCIM, a principal at Arthur Hill & Co. Realty Services in Evanston. The combination seems to work well for Church Street Plaza, which has a retail occupancy rate near 100 percent.
Projects such as Church Street Plaza are destinations in their own right. With sufficient parking, mixed-use projects that capture the excitement of university life can attract a larger customer base, according to John K. McIlwain, senior resident fellow at the Urban Land Institute in Washington, D.C.
“A mix of stores that is attractive to the university population, if it’s done well, will create a sense of place and vitality that attracts people from outside the university,” McIlwain says. “It’s fun: You’ve got interesting movies being shown, some different ethnic restaurants, and stores you wouldn’t ordinarily find, so you can create a sense of place supported by the university that also attracts outside people.”
Still, projects that fit with the long-term land-use goals of adjoining colleges or universities stand a far better chance of obtaining local development approvals, so it’s a good idea to compare notes with school planners early in the process. More than a gesture, this investigation may reveal opportunities to collaborate on a superior project.
Asking is perhaps the best way to identify a school’s space needs and the land uses it envisions next to campus. Just make sure to ask the right person, Crosby says. “There is somebody who is thinking about the real estate needs of the university,” he says. “The developer needs to find that person and establish a relationship.”
Scott S. Selig, CCIM, associate vice president for capital assets at Duke University in Charlotte, N.C., recommends getting to know decision makers on the faculty and the university foundation as well as administrators. “Private universities are usually silos of power and not pyramids of power,” he says. “The administration may hold the funds, but it may not be able to allocate those funds without faculty and board approval.”
Developers also should familiarize themselves with the funding options available to the school, says Susan H. Lawrence, CCIM, vice president/marketing of Real Estate Strategies in Orlando, Fla., and real estate adviser to the University of Central Florida. If a college is interested in seeing the project carried out as a benefit to its students or faculty, it may agree to finance the undertaking, usually at a lower cost of capital than most developers can access, she says.
It may take years to navigate the arduous infill development process from concept through permitting and construction, but those high barriers to entry empower landlords near a bustling campus to maintain high occupancy rates and charge top-of-market rents.
“Once you’re in there, you’re in there,” Kreuzer says. “That’s why we don’t sell our properties.”
For multifamily developers, many student tenants are willing to pay a premium to be close to campus. There also is the added benefit of multiple leases per unit: Most students’ leases are per bed, and the sum of multiple rents in a single unit generally exceeds the average rent for apartments in the same market.
Looked at purely in business terms, development probably is easier away from the campus edge, without the headaches that come from dealing with large institutional bureaucracies, neighborhood groups, and municipal leaders. However, for those that stick it out to completion, projects serving a university community usually generate above-average cash flow, along with the non-monetary payoff of contributing to many students’ college experiences.
“It is rewarding work,” says Perry, who likes to visit his properties when freshmen are just moving in. “You see in the expressions on the kids’ faces and on their parents’ faces that they didn’t have expectations anywhere near what they see.”