Optimizing university real estate assets

Navigating the perfect storm: a bright future for real estate asset managers in Canadian universities

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11 minute read 28 Feb. 2024
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Consulting
Real estate, hospitality and construction

Universities who think innovatively, act boldly, and respond rapidly will add value and define the future of the education sector.

In brief

  • Employing close to 410,000 Canadians, contributing more than $40 billion in expenditures and accounting for 40% percent of Canadian research and development, universities are an important driver of economic prosperity and innovation in Canada.¹
  • But with rising operating costs and deferred maintenance piling up, and reduced access to funding, changing educational models and sustainability initiatives adding pressure to existing internal constraints, resilience will be critical to their ongoing growth and success.
  • A modern and robust asset management strategy that clearly defines objectives and iterates to accommodate change will be key for schools looking to navigate a changing landscape, remain globally competitive and transform for the future.

Universities are facing a confluence of factors — past, present and future — that have asset managers in the hot seat. Those who think innovatively, act boldly and respond nimbly will not only contribute value to the bottom line, but find themselves defining the path forward for Canadian universities.

Over the past three years, while the world was recovering from the clutches of a global pandemic, three of Canada’s prominent universities — including Montréal’s McGill University — quietly turned 200 years old, a feat for a country that just celebrated its 156th birthday. With several more, including the University of Toronto, set to reach double-centarian status in the next three years, it’s fair to say that our most prestigious institutions are aging in an evolving world — a fact that has many asset managers grappling with uncertainty.

While a storied history is often associated with greater academic credibility and stronger brand presence, those tasked with maintaining turn-of-the-century facilities are facing looming challenges. Coupled with unyielding demands for space and operating deficits like those recently shared by Queen’s University threatening their very survival, it’s clear it’s time to transform how educational assets are managed.²

These obstacles are not new. Nor are they relevant only to older institutions. Relative newcomers like the University of Alberta and York University are facing many of the same roadblocks. But on the heels of record-high inflation and in the throes of a once-in-a-generation real estate crisis that limits plans for expansion, educational facilities are running out of time. And money.

How EY can help

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During times of austerity, fiscal conditions impact public services and budgets. And with experts calling for a sluggish economy in the year ahead, access to public markets and other historically stable funding sources are likely to continue drying up. For schools on the brink, it will be do or die — they either evolve to meet the future or wither on the vine.

“The problem that institutions are currently facing is very complex – increasing capital costs and growing deferred maintenance risks coupled with a reduced government funding stream,” says Andrew Sharman, University of Alberta Vice President of Facilities and Operations. “This complex question requires effort and collaboration at all levels – faculties and colleges, operations, maintenance, real estate teams, research – we need all hands on the deck to reevaluate space use needs and potential funding sources to develop a sustainable growth strategy and avoid reputational risks for the university as a result of building failures.”

The good news is there are options available to those willing to pivot operations and processes and adjust their thinking. In a culture that has traditionally been set in its ways and slow to adapt, evolving to be more nimble and resilient may present a significant challenge. But in the face of changing demands, many are stepping up and seizing opportunities in a brave, new post-COVID world.

For the most part, Canadian universities have historically had good foresight on real estate asset management requirements. Given year-over-year consistency in how assets are used, many have focused on maintaining, modernizing or, in cases where funds were available, opted for growth. But times are changing. Many older schools tasked with maintaining historic buildings are facing deferred maintenance backlogs.

More with less

With more students learning online and challenges allocating space among faculties, institutions across the country are looking at flexible classroom designs and tech upgrades when planning for underused space.

In addition to internal constraints, schools are balancing external challenges. Universities in urban centres are grappling with sky-high real estate prices, creating a housing challenge. This is exacerbated by the influx of international students. So these schools are looking for viable alternatives further from home or seeking donors and the investment needed to develop lands themselves.

Declining funding is making pursestrings tighter. The University of Alberta experienced budget cuts of $222 million over the past several years, leading to the centralization of administration services to reduce costs.³ In Ontario, cuts have put the sector’s financial sustainability “at serious risk,” according to a government panel, demanding that universities get creative on solutions.⁴

Historically, colleges and faculties have not paid directly for the use of facilities, leading to inefficiencies in how space is used, low occupancy and a lack of financial support for ongoing maintenance. According to Chris Wong, York University’s Development Corporation Acting President and CEO, internal revenue and cost distribution models are key to ensuring faculties and colleges provide a fair contribution to the maintenance and development of the real estate portfolio supporting the tuition process. York successfully decentralized its budget, requiring faculties operating as “mini companies” to “manage themselves and build a business case for an expansion, requiring them to bring more of a business mindset and viability to expansion requests,” Wong adds.

Some institutions are countering tuition freezes as a source of key revenue by aggressively recruiting international students from more countries. Others are delving into development funds or looking for creative approaches, including joint ventures and partnerships.

“Universities historically looked at the real estate from a different perspective compared to the private sector,” explains Wong. “Default funding sources for universities have always been government funding, bond financing and reserves. Over the past few decades, accessing these sources is more challenging — government funding has dried up and institutional debt capacity and reserves are run down. Universities are trying to navigate through funding shortages by reviewing their surplus land portfolios and seeking collaboration with private sector developers on student accommodation, innovation hubs and small amounts of academic space, but not entire buildings.”

Strategic partnership offices are developing business cases and conducting feasibility studies to help tap into alternative sources of funding, such as industry partnerships, and evaluating strategies to enhance the competitiveness of funding applications. Competing for government funding, McMaster University partnered in 2023 with affiliated hospitals Hamilton Health Sciences and St. Joseph’s Healthcare Hamilton, as well as with GE HealthCare to open the Centre for Integrated and Advanced Medical Imaging (CIAMI), a new facility for training, research and greater MRI access for patients.

But will these changes be enough to find a way forward, particularly with an increased trend for developing costly on-campus infrastructure to produce clean energy? The intensifying focus on net-zero targets, pending sustainability regulations and pressure from student bodies are pushing universities to think and act green — in spite of cost.

With 75% of Canadian universities having sustainability strategies aligned with net-zero targets, costly initiatives can range from retrofitting aging HVAC systems and updating windows to more innovative changes like the $23-million geoexchange heat pump system being installed at the University of Toronto to draw and store heat from century-old buildings in summer to be released back throughout the winter.⁵ Or the $7.5 million investment being made by Thompson Rivers University in Kamloops to convert from natural gas to electricity, in partnership with the private sector, which will recoup costs by charging back the school’s future heating needs.⁶

In Western Canada’s wildfire-stricken regions, change is becoming an imperative to managing the potential risk of extreme weather events, like anticipated flooding caused by clearcutting, drought and subsequent fires. As net-zero regulations become mandatory, the pressure will only intensify, begging the question: what do asset managers need to do today to transform for tomorrow?

Prepping for the future

While such market stressors have accelerated the sector’s transformation, new opportunities lie ahead for asset managers facing disruption. It’s clear that Canadian universities face complex challenges in managing their real estate portfolios and strategically allocating capital, and that effective solutions will be paramount to their ongoing success, challenges that Wong states could benefit from strategic relationships.

“Universities have become jacks of all trades, managing real estate portfolios, parking, heating and cooling systems, student housing and more. In many cases, it’s worth analyzing which roles and businesses are vital for universities to retain while delegating non-core roles to third parties to drive efficiency.”

The EY organization is working with universities, bringing global perspective and deep understanding of the real estate asset class to develop robust modelling and data analytics to help inform asset decisions.

We’ve identified seven steps asset managers could take today to optimize their assets, better allocate even harder-to-access capital and stay ahead of change.

  • Start with facility assessments. Take an inventory of what needs to be done and integrate the results into strategic asset management tools and processes. Having a holistic portfolio assessment with identified key performance indicators will allow for prioritization of your long-term maintenance plan.
  • Conduct a needs assessment. If you have underused space, consider flexible classroom designs and technological upgrades that will allow for better use of repurposed space, aligned with the institution’s changing demographics and educational requirements. Engage students, faculty and even the community — who are often looking for spaces to gather, pursue hobbies and continue adult learning. Not only will it help in defining strategies, but opening up space may help generate goodwill with the community while supplementing school coffers.
  • Create a robust asset management strategy. Identify requirements and objectives for assets aligned to the university’s overall strategy. Use this to develop a formal asset strategy document than can be updated when pivots are required and iterated over time. Identify processes, models and tools to help allocate capital, both for decision-making and monitoring of investment outcomes.
  • Prioritize through a broad lens. Once needs are identified, important next steps involve developing an asset prioritization framework to reflect business value. Resilient and sustainable KPIs should consider multiple factors, from economics and finance to strategic and environmental initiatives. Ranking requirements can help define and align decisions, reduce bias and support trade-offs as needed, making communicating priorities to stakeholders easier.
  • Take a look at real estate holdings, needs and wants. Review lease agreements and look for opportunities to negotiate favourable terms. If you’re expanding an existing campus and costs are high, look for alternative locations that may be more affordable and allow for better housing options for students. Make strategic real estate decisions on real estate assets within your budget constraints, and consider potential joint ventures or partnerships.
  • Do a deep-dive on funding gaps. Launch a feasibility study if you’re looking to build or expand facilities or services. Develop a business case or consider scenario planning to address needs and mitigate impacts, look for opportunities to enhance the competitiveness of funding applications and, as needed, identify alternative funding sources such as industry partnerships when traditional funding may not be available.
  • Assess your ESG strategy. Incorporate sustainability objectives and priorities into your asset management decision-making, aligned with the school’s values, long-term financial goals and compliance with today’s regulatory requirements as well as those in the future. While only the E of ESG is currently top of mind, social and governance are not far behind. Identify energy-efficient solutions and flag relevant government grants the university may be eligible for. And don’t neglect risk — conduct vulnerability assessments, recommend resilience strategies and develop comprehensive risk mitigation plans, including insurance coverage and contingency funds.

A new hope

While challenging and complex, the process of balancing short-term operational demands with long-term institutional goals requires deep analysis and stakeholder involvement to deliver efficiencies and help lead to better outcomes.

Sometimes doing so requires smart strategic capital allocation, or having to make hard choices among competing priorities, like whether to invest in infrastructure upgrades or support the building of new research facilities. Staying true to strategic priorities and relying on financial modelling, data analytics and ROI monitoring can help. Other times, it may be a question of technology integration, deciding whether to invest in infrastructure upgrades to protect against cybersecurity breaches.

With the right asset management strategy in place — built with flexibility in mind — portfolio managers will have the tools needed to support decisions and allow them to strike when the iron’s hot, taking their institutions into a once-in-a-generation transformation with confidence, and coming out with a competitive edge. 


Summary

Canadian universities face complex challenges in managing their real estate portfolios and strategically sourcing capital. With the looming threat of privatization, rising costs and changing educational models, the need for effective solutions over the next few years will be critical.

Let’s explore how EY teams can help you explore the challenges and solutions, and share international examples to help guide you in optimizing your university real estate assets.

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Related topics
Consulting
Real estate, hospitality and construction

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