The pandemic isn’t entirely behind us yet, but many colleges and universities see the writing on the wall when it comes to funding future on-campus housing projects. Tighter budgets, more privacy, possible future closures, and nearly two years of delayed, deferred or canceled projects have driven a wedge between what establishments need to offer their students to remain competitive and what they have to work with.
Enter the pubic-private partnership (P3). These arrangements between private investment firms and public universities have been bridging the funding gap for nearly 20 years. In a post-COVID world, however, their presence isn’t just appreciated, it’s vital in many instances.
“COVID has shown how important P3 relationships are for institutions facing budget cuts and higher costs,” says Michael Leonczyk, director at Chicago-based Harrison Street. “There is a growing acceptance of P3s as a critical vehicle to allow higher education institutions to stay on the cutting edge when it comes to retaining and attracting students and ensuring they have access to resources that facilitate their academic and social lives. This includes housing, dining, parking, energy, water and athletics.”
In 2003, there were three higher education P3 transactions, which totaled $100 million. By 2016, this number had swelled to 28 deals totaling $3.1 billion, according to Ernst & Young. Today, Washington, D.C.‐headquartered development advisory and program management firm Brailsford & Dunlavey, which recently released its “Higher Ed P3 State of the Industry” report, is tracking about $11 billion worth of projects in the pipeline.
Increased Need, Increased Reliance
Jay Pearlman, senior vice president of The Scion Group’s Advisory Services unit in Chicago, certainly believes the numbers. He knows universities are dealing with layouts and unit types that have fallen out of favor with students due to health and safety concerns. He also knows deferred maintenance is at a record-high level. Put the two together and it equals a significant need for housing renovations and/or replacements.
“Unfortunately, many schools will not be in the position to perform these updates as institutional operating costs rise and revenue streams remain strained,” Pearlman says. “What capital and debt capacity is available, including from significant federal government funds, will often be prioritized to academic and other core purposes. As a result, we expect to see an increased number of institutions exploring alternative financing and public-private partnerships. Certainly the amount of activity our team has seen in providing feasibility, student housing planning and implementation services confirms this.”
The change in layout preferences and deferred maintenance may place further strain on the current housing supply, notes Jamie Wilhelm, executive vice president of public private partnerships at American Campus Communities.
“Community renovations, which often also tackle deferred maintenance, may result in a net loss of available beds if density is reduced or units are converted into community space,” he explains. “This necessitates the development of strategically valuable new communities. Likewise, some institutions are considering new on-campus housing policies that may require new development, resulting in additional bed capacity. All in all, P3s offer universities an attractive alternative to more quickly implement student housing master plans and achieve institutional strategic objectives.”
This was the case at Appalachian State University in Boone, North Carolina. The school sought to replace all of its core campus dorm housing with modern residence halls in an effort to support and enhance its strong freshmen retention rate. The university entered a P3 with Georgia-based RISE on the three-phase, $191 million development, which will replace six dorms totaling 1,700 beds with four modern dorms and 2,300 beds.
Residence Halls Raven Rocks and Thunder Hill were delivered in August 2020, while Laurel Creek Hall was completed one year later. New River Hall and the Peacock parking garage are slated for delivery in August.
Appalachian State’s chancellor, Sheri Everts, noted the need to balance current challenges with future plans during Laurel Creek Hall’s recent ribbon cutting.
“This residence hall, and the many other projects in progress on our campus, represent the future of App State,” she said during the event. “At a time when the focus has been very much on the day to day, we also have our sights on the horizon — anticipating the needs of the Appalachian community and planning for generations of Mountaineers to come.”
Greg Blais, president of RISE, also noted the challenges of developing such a large-scale project during a time of industry upheaval.
“Although we had to quickly adapt our plan due to the disrupted financial markets, we were able to achieve a record-setting cost of capital in our ultimate financing approach, as well as lock in all of our construction pricing before the huge spike in wood framing that occurred just a few weeks later,” he says. “This was a product of the intense flexibility, collaboration and collective industry experience that went into making the optimal decisions on the project’s behalf, which is now proving to have added tremendous value to the P3.”
Operating in Uncertainty
Blais wishes more decision-makers were able to balance their short- and longer-term priorities the way Chancellor Everts did. As the pandemic proved, taking a wait-and-see approach didn’t necessarily pan out due to increased demand, labor shortages and a lack of materials. All told, this meant higher prices and longer wait times.
“P3 challenges have often involved the initial ‘pulling the trigger’ by universities to commit to moving forward with confidence in the program’s ultimate success,” Blais adds. “Once that hurdle is overcome, the challenges have involved timing to market due to material pricing and supply chain stresses on the delivery schedules. Budget and schedule development have become an even greater focus of the entire partnership than in the past due to these pressures.”
The pull-the-trigger approach also benefited the New Jersey Institute of Technology (NJIT) in Newark when officials decided to continue with the school’s $95 million mixed-use student housing project called Vue on Warren.
“Despite all of the headwinds, NJIT successfully reached financial close in April 2021,” says Jeff Turner, executive vice president and co-leader of the higher education practice at Brailsford & Dunlavey, which worked with NJIT on an approach that would address the school’s needs. These needs included supporting growing enrollment, developing the campus edge, recruiting non-local students and getting reimbursed for land costs.
Brailsford & Dunlavey determined a P3 could fast track the project, lower construction pricing, aid in efficiencies and make it easier to navigate with various external stakeholders. NJIT eventually entered into a P3 with RISE. The 548-bed Vue on Warren is slated to open before the fall 2022 semester.
“The financial structure had to shift a bit to accommodate the changing market conditions, with the university providing additional support, but it helped reduce the cost of capital and, thus, student rents,” Turner continues. “This fall the school welcomed one of its largest freshman classes. The building is set to open next summer and will help with the school’s enrollment management objectives. It will also support NJIT’s over-arching strategic objective to recruit students from outside the region, including international students. The timing was great because a project delay would likely have resulted in increased construction costs to the tune of 15 percent to 20 percent, as well as an uptick in interest rates.”
Blais adds that the currently underway NJIT project is already enjoying some successful milestones.
“NJIT’s determination and foresight to press forward, along with the development team’s extensive analysis of delaying the project, has proved to have provided substantial equity for the project by locking in lower construction pricing for the August 2022 delivery before the pent-up demand and supply issues rushed onto the scene,” he says.
The New Normal for P3s
An increased reliance on P3 funding isn’t the only trend occurring in this space. At least not in terms of higher education. Turner notes the demand for P3s isn’t solely one-sided. Private investment firms are just as interested in these arrangements now that the worst of COVID is perceptively behind us.
“Today, the new word in higher education is resiliency, as these schools have weathered the storm and many have come back stronger,” he says. “While the private sector was initially concerned about the investment quality of the sector as campuses shut down in March 2020, it has come roaring back with more private sector interest than ever before.”
P3s may be more popular than ever, but that doesn’t mean the needs of both parties haven’t evolved. Josh Smith, senior vice president at Balfour Beatty Campus Solutions, notes some priorities have changed for universities. This has caused them to adjust their strategies as they tackle today’s challenges while acknowledging tomorrow’s needs.
“We’ve seen a small shift in schools looking to receive more compensation up front versus over time to help shore up their balance sheet in the interim,” Smith says. “They are obviously giving up a larger revenue stream over time but they are in ‘the dollar today is worth more than a dollar tomorrow’ mentality. Schools with excess land are finding a lot of interest from multiple types of developers that want to be adjacent to campus for projects like hotels, life sciences and housing, and this allows for additional revenue streams for schools.”
Flexibility — ever an asset for any type of deal or construction project — has also taken on paramount importance in this unpredictable environment. Ned Williams, senior vice president of student living at Michaels Student Living in Camden, New Jersey, experienced this firsthand as his firm delivered the 3,400-bed Green at West Village for its P3 partner UC Davis. This was the largest net-zero energy project in North America, and it was delivered on time and on budget.
The Green at West Village opened in fall 2020 during a time when many universities opted to remain closed, employing remote learning instead.
“There were supply chain issues, labor issues, regulatory issues, none of which we could anticipate,” Williams says. “But we were flexible and worked closely with our university partners to come up with solutions together. That communication and teamwork is always important in an on-campus P3, but it is particularly important when unforeseen challenges arise. The universities know their campus and their students better than you do and can help find unique solutions.”
Times like these are exactly why the third “P” in public-private partnership is the most important one, Wilhelm notes.
“This is when partnerships are tested and character is revealed,” he says. “Partnership is not difficult when things are all going well. True partnership is revealed by how we behave during times of significant duress.”
Significant duress is also being examined legally, as Turner points out.
“Both parties now having a better understanding of their current deals and understanding of the risk moving forward,” he says. “No ground lease we ever worked on pre-COVID contemplated a campus shutting down. Now all deals are adding these types of provisions, including additional reserve requirements and other solutions to accommodate future pandemics and other potential campus closures.”
These are important provisions, as Pearlman notes ground leases are more popular than ever. He says many campuses now utilize them to provide the external funds needed to carry out renovations and deferred maintenance — items that often went untouched during the pandemic when schools were in hunker-down mode.
One provision receiving a lot of attention in P3 agreements is force majeure.
“The shutdowns of campus housing across the country created a situation that was not anticipated by many of the operating agreements in place in on-campus P3 developments,” Pearlman says. “There was confusion over who made the ultimate decision to close, who bore the financial risk and whether P3 residents were entitled to the same cost adjustments or termination rights that those in campus-owned housing received. Our advisory services team is currently working with clients to clarify force majeure and other emergency operating procedures to avoid such uncertainty going forward.”
Wilhelm welcomes these discussions. He believes other student housing owners and developers will as well. The industry has lived through the worst-case scenario, after all, and all parties made it out alive.
Now that student housing is emerging wiser and perhaps a little stronger — thanks in no small part to P3s — it’s time to evaluate what success looks like now and in the future. How universities can get there may often involve a little help from their friends.
“Universities, developers and owner/operators will evaluate future P3 opportunities based upon a new post-COVID paradigm focusing on how the community will perform and be operated in the event of another pandemic,” Wilhelm says. “We will all need to answer the question: Are the unit types, community spaces, operational policies/procedures, residence life programming and community infrastructure acceptable during both times of normal operations, as well as when a public health crisis creates disruption?”
—Nellie Day
This article was originally published in the November/December 2021 issue of Student Housing Business magazine. To subscribe, please click here.