Universities want our money long after the degree has been granted and the last tuition check clears. Years after graduating, I still get mail (and occasional phone calls) from my alma mater requesting financial support. Though I never provide a forwarding address, and no matter how many times I move, they always find me. It?s unsettling.
Considering each student spends a year?s income (or the equivalent in incurred debt) on a degree, you?d think that would keep most colleges and universities relatively satisfied. But no amount of tuition, charitable donations, and alumni fundraising seem sufficient for the ever-growing industry.
The New York Times published a great article about the increasing debt of U.S. colleges. Public and private, schools are borrowing more than ever in order to update, beautify, and expand their facilities. As higher education becomes increasingly competitive (among both traditional universities and for-profit, partly online schools like the University of Phoenix), the prestige of an extravagant new library or residence hall has become a way to attract students.
Of course, this surge of development has been great for the real estate and construction industries.?But it comes at a cost, the New York Times explains:
A decade-long spending binge to build academic buildings, dormitories and recreational facilities ? some of them inordinately lavish to attract students ? has left colleges and universities saddled with large amounts of debt. Oftentimes, students are stuck picking up the bill.
Overall debt levels more than doubled from 2000 to 2011 at the more than 500 institutions rated by?Moody?s, according to inflation-adjusted data compiled for The New York Times by the?credit rating agency. In the same time, the amount of cash, pledged gifts and investments that colleges maintain declined more than 40 percent relative to the amount they owe.
A recent report published by Harvard (one of the worse offenders when it comes to this spend-and-borrow mentality) warns of ?rapid, disorienting change? for the sector.
Which leaves commercial real estate in something of a predicament. After the recession?s initial construction drought, universities? aggressive development strategies have created an enormous amount of business for firms like Campus Crest Communities (NYSE: CCG), Student Apartments, University Housing Group, and Polaris Real Estate Equities, just to name a few of the big student-housing concerns. ?A simple Google search reveals a slew of new developments announced or begun in just the past few weeks:
- Seattle Central Community College is planning a 6-story student housing project?despite a recent drop in enrollment
- New student housing is being viewed as an important part of Wichita State?s growth
- In D.C., Georgetown University opens Regents Hall, a five-story, $100 million science building
- And in Philadelphia, Drexel University has accumulated the better part of half a billion dollars in debt to expand its campus, the NYT reports
This is just the tip of the iceberg. While it seems a lucrative opportunity for investors and developers in the near term, mounting debt has a way of catching up with everyone. And because some CRE firms, especially student-housing developers, are now maintaining long-term commitments with universities?owning and operating student housing themselves?they too face the peril of declining enrollment and unmanageable debt.
In the short term, universities? financial burdens will fall on the students in the form of tuition hikes. But many potential students are ?weighing the value of a college degree against its cost, and some are deciding it?s not worth the investment?no matter how pretty or expansive the university may be.
Source: http://llenrock.com/blog/debt-101/
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