Global Research and Consulting August 2014
INTRODUCTION
In recent years, the ranks of office and retail tenants in Florida have expanded to include for-profit educational institutions. Today there are at least 28 for-profit colleges in the state occupying more than 4 million sq. ft. of space in multi-tenant buildings, most of which is concentrated in a handful of cities. The U.S. Department of Education (DOE) has proposed regulations that could have an extremely detrimental impact on the bottom line of these schools if they are deemed to have failed in their obligation to prepare students for gainful employment. Failing schools will likely be forced to reduce staff and vacate operational locations and instructional centers, which in turn could drive down absorption and increase vacancy in the commercial real estate markets in which they are located.
PROPOSED REGULATIONS
For-profit colleges are a multibillion-dollar business in the United States, and one that relies heavily on money from the federal government for its health and profitability. According to a study of 30 major non-profit education companies by the Senate Committee of Health, Education, Labor and Pensions, 79% of the revenue generated by the firms in 2010 came from the federal government in the
form of federal student aid.1 In 2010 alone, $32 billion in
federal aid flowed into for-profit colleges.
Over the last several years, the DOE has grown increasingly concerned about the practices of for-profit colleges. One reason for the concern is the poor record of for-profit college graduates when it comes to finding gainful employment. As a condition of eligibility to receive federal student aid, nearly all for-profit colleges are required to provide training that prepares students for gainful employment. However, according to the senate committee’s study, many graduates
of for-profit colleges are unable to find employment in the professions in which they have been trained, or they find employment at low wages that leave them struggling to make payments on their student debt.
In an effort to help ensure better outcomes for students at for-profit colleges, U.S. Secretary of Education Arne Duncan has proposed to amend the regulations on institutional eligibility for federal student aid programs under Title IV of the Higher Education Act of 1965. The proposed amendment would establish measures for determining whether these institutions prepare students for gainful employment in recognized occupations, and the conditions under which these educational programs remain eligible for federal student aid. Underperforming institutions will forfeit their access to tax-payer-funded student aid.
Under the proposed amendments, institutions will be required to publicly disclose information about program costs, debt, and post-educational students outcomes. Programs would be deemed “failing” if loan payments of typical graduates exceed 30% of discretionary income or 12% of total annual income. Programs will be given a warning if students’ loan payments amount to 20% to 30% of discretionary income, or 8% to 12% of total annual income. Discretionary income is defined as above 150% of the poverty line and applies to what can be put toward non-necessities.
The DOE issued a similar rule in 2011, but a judge struck down most of it following a lawsuit by an industry group representing for-profit colleges. However, the judge upheld the DOE’s authority to regulate career college programs and urged them to try again, next time providing a clearer justification for the metrics it uses to assess institutions’ by Quinn Eddins
Director, Research & Analysis
NEW REGULATIONS MAY CAUSE FOR-PROFIT COLLEGES TO REDUCE THEIR
FOOTPRINT IN FLORIDA’S REAL ESTATE MARKETS
August 2014 lo ri d a V ie w P o in t: R e g u la to ry R is k - F o r-P ro fi t C o lle g e s
performance. Since then, the DOE has revised its amendment, and as of July 1, intends to move forward with implementation of the revised regulation in 2015.
If implemented, the standards proposed in the amendments would not take effect immediately. The provisions allow institutions a few years to improve their programs and to ensure that those improvements are reflected in their evaluations.
IMPLICATIONS FOR REAL ESTATE
Florida markets are already seeing the impact of the proposed regulations. At least three major institutions have reduced their office footprint as a result of the initial regulations proposed in 2011. Kaplan University vacated about 46,000 sq. ft. in Boca Raton over the past two years; consolidated operations at several other locations in Fort Lauderdale, Cypress Creek and Plantation; and is no longer enrolling new students in Jacksonville. These actions were a direct result of declining student enrollments, thus forced staff reductions, due to adjustments in business operations for compliance with DOE regulations. Everest University and University of Phoenix have also seen significant staff reductions and campus closings as a result of the proposed amendments. In 2013, Everest University consolidated its space in Fort Lauderdale and University of Phoenix vacated 15,000 sq. ft. in Daytona and terminated a lease early in Palm Beach Gardens.
As shown in Figure 1, Everest University occupies 577,808 sq. ft. of commercial real estate in Florida, more than any other for-profit institution. The majority of this space, 97%, is concentrated in the Miami, Tampa, Jacksonville, Lakeland/ Winter Haven, and Orlando metropolitan areas. Everest University is owned by California-based Corinthian Colleges, Inc., which the DOE placed on “heightened cash monitoring” status in June 2014. A July 2, 2014, SEC filing submitted by Corinthian outlines the drawdown of financial aid funds, cessation of student enrollment and
the sale of 85 schools nationwide within the next six months. The list of schools for sale includes 10 Everest locations in Florida. While it does not appear imminent that Everest University will shut down, due in part to the DOE’s desire to protect current students, the recent regulatory actions highlight the tenuous position of the institution and the risk to Florida’s commercial real estate markets. While the total footprint of for-profit colleges in Florida accounts for only a tiny fraction of the rentable area in the state, downsizing on the part of these space users could have an outsized impact on the markets in which they are concentrated. Office markets are
Rank Institution Campus Location Total RBA Enrollment FSL Aid %* 1 Everest Various 577,808 50,769 87% to 100% 2 Full Sail University Winter Park 45,000 23,497 75% 3 Ultimate Medical Academy Various 55,162 12,807 61% to 76% 4 Florida Career College Various 319,670 5,793 91% to 97% 5 Art Institutes Various 265,888 5,756 87% 6 Rasmussen College Various 112,148 5,748 92% 7 University of Phoenix Various 290,723 5,252 90% to 98% 8 ITT Technical Institute Various 284,762 4,224 56% to 91% 9 Florida Technical College Kissimmee 69,994 3,790 95% 10 DeVry University Various 248,699 3,742 90% 11 Fortis College Various 269,428 3,551 58% to 100% 12 Universal Technical Institute Orlando 56,647 3,391 82% 13 Strayer University Various 174,508 3,234 36% 14 Beauty School of America Miami 55,700 2,770 76% to 95% 15 Florida National University Various 71,286 2,506 82% 16 Le Cordon Bleu College of Culinary Arts Orlando 126,731 2,484 87% 17 International Academy of Design and
Technology Tampa/Orlando 201,008 2,452 82% to 97% 18 Dade Medical College Various 80,219 2,273 68% to 99% 19 South University Various 41,839 1,907 91% 20 Concorde Career Institute Various 129,184 1,887 81% to 88% 21 Sanford-Brown Institute Various 229,953 1,867 92% to 98% 22 Argosy University Tampa/Sarasota 42,000 1,547 50% to 63% 23 Southeastern College Various 123,977 1,535 53% to 57% 24 Aveda Institute Various 30,961 1,340 44% to 63% 25 Florida College of Natural Health Various 83,921 1,153 54% to 87% 26 Heritage Institute Jacksonville/Ft. Myers 52,502 1,019 67% to 78% 27 Brown Mackie College-Miami Miramar 56,519 1,016 91% 28 Kaplan College Various 57,685 * 58% to 100% Total Sq. Ft. 4,153,922
*Federal Student Loan Aid % New Undergraduates (2010-2011) ** Predominately online enrollment Figure 1: For-Profit Institutions in Florida, Enrollment Details
Source: CBRE Research, National Center for Educational Statistics (NCES), Q2 2014. List includes only schools with more than 1,000 students
August 2014 lo ri d a V ie w P o in t: R e g u la to ry R is k - F o r-P ro fi t C o lle g e s
MSA For-Profit RBA (SF) MSA For-Profit RBA as % of State RBA
Office Retail Flex MSA Total
Miami-Ft Laud-Pompano 1,184,723 300,123 100,643 1,585,489 38.2%
Tampa-St. Pete-Clearwater 842,949 52,800 10,000 905,749 21.8%
Orlando-Kissimmee-Sanford 621,533 83,857 705,390 17.0%
Jacksonville 328,905 69,739 52,189 450,833 10.9%
Lakeland-Winter Haven 166,798 166,798 4.0%
Cape Coral-Ft. Myers 92,948 92,948 2.2%
Pensacola-Ferry Pass-Brent 51,272 51,272 1.2% N Port-Brad-Sarasota 51,046 51,046 1.2% Deltona-Daytona-Ormond 35,444 35,444 0.9% Port St. Lucie 35,000 35,000 0.8% Tallahassee 19,044 14,500 33,544 0.8% Ocala 23,636 23,636 0.6% Palm Bay-Melbourne-Titusville 16,773 16,773 0.4% Grand Total 3,348,355 558,878 246,689 4,153,922 100.0%
particularly at risk. Across the state, 81% of the space occupied by for-profit institutions is in office buildings, 13% is in retail centers and 6% is in flex/industrial properties, as shown in Figure 2.
The office markets in Fort Lauderdale, Miramar, Miami, Orlando, Tampa and Jacksonville are particularly vulnerable to the effects of the pending regulations, as for-profit colleges occupy in excess of 100,000 sq. ft. of office space in each of them. Downsizing and consolidation of for-profit colleges could impact the balance of supply and demand in these markets. As shown in Figure 3, the total amount of office space occupied by for-profit colleges in these markets is higher than the net absorption in nearly every quarter over the last three years. As the new regulations will presumably take effect for all for-profit colleges simultaneously, multiple colleges could lose access to federal student aid at roughly the same time. Given the
amount of office space occupied by for-profit colleges in these markets, the simultaneous loss of funding for these institutions could wipe out positive net absorption in all but the best of quarters.
Looking ahead, it will be important for commercial real estate professionals to be aware of the impending regulations for this particular class of occupier in order to anticipate vacancy or gauge tenant quality. It will also be important to bear in mind future downsizing and consolidation of for-profit colleges when interpreting trends in vacancy over the next several quarters. Such consolidations may inflate vacancy figures, but as they reflect government interventions affecting a very specific type of user, they will not necessarily reflect widespread weakness in demand for commercial real estate space.
Figure 2: For-Profit RBA per type and MSA
August 2014 lo ri d a V ie w P o in t: R e g u la to ry R is k - F o r-P ro fi t C o lle g e s
Figure 3: For-Profit College Office Space vs. Quarterly Net Absorption
Quarterly Net Absorption (000’s of sq. ft.) Office Space Occupied by For-Profit Colleges in Q2 2014 (000’s of sq. ft.)
Fort Lauderdale Jacksonville
Miami Miramar Orlando Tampa -200 -150 -100 -50 0 50 100 150 200 250 Q1 '10 Q3 '10 Q1 '11 Q3 '11 Q1 '12 Q3 '12 Q1 '13 Q3 '13 Q1 '14 -300 -200 -100 0 100 200 300 400 Q1 '10 Q3 '10 Q1 '11 Q3 '11 Q1 '12 Q3 '12 Q1 '13 Q3 '13 Q1 '14 -600 -400 -200 0 200 400 Q1 '10 Q3 '10 Q1 '11 Q3 '11 Q1 '12 Q3 '12 Q1 '13 Q3 '13 Q1 '14 -150 -100 -50 0 50 100 150 200 250 Q1 '10 Q3 '10 Q1 '11 Q3 '11 Q1 '12 Q3 '12 Q1 '13 Q3 '13 Q1 '14 -200 -100 0 100 200 300 400 500 600 Q1 '10 Q3 '10 Q1 '11 Q3 '11 Q1 '12 Q3 '12 Q1 '13 Q3 '13 Q1 '14 -400 -200 0 200 400 600 800 Q1 '10 Q3 '10 Q1 '11 Q3 '11 Q1 '12 Q3 '12 Q1 '13 Q3 '13 Q1 '14 Figure 3: For-Profit College Office Space vs. Quarterly Net Absorption
August 2014 lo ri d a V ie w P o in t: R e g u la to ry R is k - F o r-P ro fi t C o lle g e s Quinn Eddins
Research & Analysis Director Florida Research
CBRE
t: +1 305 779 3114
e: quinn.eddins@cbre.com
Abu Mansoor
Senior Research Analyst Florida Research CBRE t: +1 954 331 1733 e: abu.mansoor@cbre.com Shanna Drwiega Research Analyst Florida Research CBRE t: +1 813 273 8433 e: shanna.drwiega@cbre.com
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