One day apart, I toured two private universities less than 20 miles from each other. One was a large, name-brand institution with an illustrious football team, and the other noted its softball team with middling success in their D-III conference. One had millions of square feet of funded research space, while the other proudly demonstrated their single modern lab space shared among their science courses. One was looking to manage an enrollment boom coming out of the COVID-19 pandemic, and the other was soberly posturing that their peak enrollment years might be behind them.
The contrast between these two universities couldn’t have been starker. Both were terrific institutions with impressive alumni lists, heavy-duty boards and long, boast-worthy histories. But ultimately, the business outlook for each was vastly different.
This contrast isn’t at all unique. Across the United States, the paths of large and small institutions have been diverging for some time. In the early 2010s, economists predicted that hundreds of small private schools across the U.S. would be defunct within a few decades. Yet, several factors have influenced the aggressive expansion of large institutions: increased brand awareness, diversified revenue streams to address the rising cost of education delivery, and — critically — the fungibility that comes with expanded college choice.
Let’s look at a generalized history of small institutions for context. In the U.S., a huge number of small private institutions were established in the decades following the Civil War by faith-based or social organizations to offer education to their adherents as they became teachers, faith leaders and heads of the community. In a time when transportation was difficult and it was rare for many people to venture out of county, much less out of state, it was incumbent upon these parent organizations to provide accessible instruction to their constituents in the vast, disparate pockets of the country in which they might live. Therefore, as an example, the various branches of the Lutheran church introduced 57 colleges across the United States, 39 of which still operate today. It’s notable that not one of these schools ever had enrollments over a few thousand students.
Multiply this across dozens of Catholic, Protestant, Orthodox, Jewish and various nonsectarian groups — each with their own parallel efforts. In most of these cases, offering a “liberal arts” education based on long-established scholarship was an extraordinary asset for graduates at a time when such philosophical exposure and analytical rigor was rare. Most historical economists agree that the United States’ economic trajectory was significantly impacted by this highly accessible model of higher education.
Fast forward to today and these same factors that originally led to the establishment of hundreds of liberal arts institutions across the country have dissipated. The role of specific faith traditions in college choice is dramatically different from 100 years ago. The diversity — and application — of fields of study has expanded and deepened and students are more at liberty to travel away from home than ever before. As much as colleges and universities can attract broader student populations, so too can students select from a near-impossible number of institutions. Furthermore, our rapid shift toward online and hybrid learning during COVID only accelerated this.
Larger institutions have had a natural head-start in attracting students from far beyond their historic pools. The smaller, local institutions — despite their rich heritages — are being faced with a competitive challenge: differentiation. As analysts have noted in the past, the United States has more smaller, local, liberal arts institutions than the modern marketplace requires, and, unless schools can distinguish themselves amongst their peers, it will become harder and harder to compete for enrollment.
What does this mean for student housing investment? Should one avoid investing in small colleges because they are all doomed to fail? Of course not. In my experience working with many college boards (large and small), smaller colleges are much more structurally agile and dynamic. They are able to respond to market factors relatively quickly and make business-driven decisions less beholden to political factors or wishful thinking.
Over the last several years, I’ve observed many private colleges and universities undertake institutional overhauls and ambitious projects to differentiate themselves within the collegiate marketplace. As a part of this, they have teamed with professionals to take comprehensive stock of their real estate portfolio to streamline it around focused visions of the future. The core economics and current financial realities mean that most smaller institutions will only succeed long-term through clever business efficiency and bold transformation. But most of these institutions are set on doing exactly that. And as Virgil notes, audentes fortuna iuvat—fortune favors the bold. (Well, and the financially astute.)
There are several investor groups that understandably focus on the value of the dirt underneath the institution, as a matter of recourse in the not-entirely-unlikely event the college should fold in the coming decades. On the one hand, this may be an unpleasant but necessary component of the real estate investment world. On the other, it can bode poorly for working from a place of aligned interest.
But one might look at a valuation of private collegiate real estate through another lens: the value of its institutional real estate may be an effective data point in predicting a college’s ability to reform into a necessary future state. This is because it correlates, in a general sense, to the regional economic context in which the small college operates, as well as a core set of capital resources that it can leverage toward its future endeavors. Many small colleges will not survive the next 20 years, but many will. Data suggests that those with higher-value real estate overall will disproportionately be in the latter camp.
Large universities, by contrast, tend to have significant advantages headed into the future. Institutions will continue to endure the counter-cyclical nature of demand for higher education. Furthermore, low birth rates and a sustained period of low immigration over the last few decades mean that the U.S. population profile portends that future growth in higher education demand will not be driven by demographics.
Generally, large universities with strong brand recognition, diverse revenue streams and resources, and broad academic offerings have distinct advantages in weathering demand fluctuations and adapting to the tech-forward pedagogy of the coming years. Smaller institutions that are adaptable will still be around, but they will likely look different: they will be better differentiated from one another, highly focused on core competencies and specialties, with highly efficient business operations and bold leadership.
Of course, every institution has its own unique story, location, culture and financial outlook. But as the pandemic has accelerated a great number of trends in American life, so too do we see the acceleration of the divergent trajectory of these two general types of institutions. Of course, only time will tell what the future holds for both. But, as Virgil also said, tempus fugit—time flies.
—James Birkey is senior vice president of education with JLL.