In 2008, Marion Moskowitz was very concerned. She and her husband, Dave, had recently purchased a 225,000 square foot former textile mill for $2 million and were in the process of converting it into multi-tenant use. At the time their project, Franklin Commons, had only four tenants, leasing a total of 20,000 square feet. Meanwhile, the real estate markets were crashing and taking some of the largest securities brokerage firms, banks, and even an insurance company down with them. The company that Marion and Dave created in order to purchase the property, Palma, LP, seemed to be facing some very difficult times.
Things went much better than she expected, however. In the intervening years, Palma has leased an additional 197,000 square feet, increasing their occupancy rate from less than 9% to more than 96%. Better yet, four of the current tenants are interested in expanding their space. All of this was accomplished in a market that CBRE indicates has a current office occupancy rate of only 78%.
The key to their success is their somewhat unusual tenancy. While Franklin Commons does have office and retail tenants, more than 80% of the space is occupied by various private and charter schools.
It’s no secret that a college degree no longer confers the virtually sure path to affluence that it once did. The costs of education have increased rapidly in recent years. Meanwhile, the employment prospects for graduates have dwindled. Government regulations have prevented the new money that has been created in the past five years from finding its way into real estate or businesses, but this is not the case with education. Thus, it is becoming increasingly easy for college and post-graduate students to build up tremendous debt through education loans but increasingly difficult for them to pay these back with their post-graduate income. The similarities of today’s higher education markets to the housing markets of a decade ago are striking.
Further complicating the problem is the difficulty that parents now have in saving for their children’s education. Interest rates have been so low that the fees for a college fund are often higher than the interest earned. By the time the kids ready to go to college, the money in the fund is substantially less than the sum of the amounts that were put into it.
Yet education is more important than ever. In the 1980’s, everyone knew how to use just about every telephone. Today, just getting a smart phone to dial a number or to ring the way you want it to involves a certain learning curve. Getting a new phone connected to all of your email and networking services and learning to use all of the apps is a major undertaking. If you’re an iPhone user, good luck making a call on your friend’s Android. The same is true of many consumer appliances, and the complexity only increases with business machines. The increasingly complex concepts required for any career or profession only add to the need for education.
It may seem as if online education is the answer to all of this but different people learn different things in different ways. Many people have difficulty learning and taking exams in online classes. There will always be a demand for classroom learning.
What we can expect to see in the next decade is an increasing insistence on the part of students and parents that any type of higher education pay for itself within three years or less after graduation. Many technical schools, community colleges, for-profit colleges and adult education programs already meet this requirement. Most public universities do not. As this trend unfolds the demand for classroom space close to students’ home will increase. There will be an increased demand for more practical curriculums in terms of job prospects after graduation. Classroom space that can accommodate the schools meeting these criteria will thrive.
A study entitled Characteristics of Students Enrolling at For-Profit Colleges found that students enrolling in these institutions have lower family incomes, parents without college degrees, and tended to classify themselves as Hispanic or Latino, so areas with these demographics are apparently fertile for this type of investment. The very best areas will probably be lower income pockets within high income regions.
Classroom space as a potential real estate investment is so new that it’s not even identified as a property type by any broker reports or data services that I’m aware of, so a demand and supply analysis of space will probably require primary research. Consideration of office, retail, and even industrial space that could be readily converted into classroom space is important.
Marion Moskowitz has kept detailed records of what’s worked and what hasn’t for Franklin Commons and is willing to share them with readers of The Daily Capitalist who are interested.
Doug McKnight has been a commercial real estate appraiser for 23 years. He previously served as a director for the national appraisal firm Marshall & Stevens. He is currently the managing director of CapStruc Advisors and is working on a book on the value of assets. Contact him at: firstname.lastname@example.org.