The Evolution of Post-Secondary Institutions & Launch of PEP Commingled Fund: SHURE Initiative Interview Fred Pierce

The SHURE Initiative interviewed Fred Pierce, President and CEO of Pierce Education Properties, commonly known as PEP, a leading U. S. student housing investment and operating business. In addition to his real estate investment and development company, Mr. Pierce is very active with post-secondary institutions. 

Mr. Pierce is a trustee emeritus of the 482,000-student, 23-campus California State University system. In addition, Mr. Pierce is chairman of the Board of Trustees of Pierce University and chairman of the NMHC Student Housing Research Fund Advisory Board. Mr. Pierce is also involved in the Campanile Foundation, SDSU’s Fowler College of Business Board, SDSU’s Corky McMillan Center for Real Estate, SDSU Mission Valley Campus Residential Advisory Board, Sonoma State University’s Wine Business Institute, University of Georgia’s Residential Property Management Advisory Board and the Beta Theta Pi Foundation, among others.

In this SHURE interview, Mr. Pierce answered timely questions about the university operating environment today. Mr. Pierce offered an analysis of priorities for university executives in the post-pandemic period trends involving university real estate entities, such as property trusts, and enrollment fluctuations in U. S. institutions. Mr. Pierce offered an analysis of federal involvement in the education system.

SHURE: Post-pandemic, are you finding that university boards and leadership have changed priorities? For example, is there more focus on food service, security, and campus health services?

FP: It’s an interesting question because during COVID and the pandemic, we all saw what happened, right? Universities immediately pivoted to 100 percent online course delivery and moved all the students off campus, like in April of 2020. Everybody shut down, and everybody sent everybody home. And then that next fall, the common theme was de-densification, right? Anybody open or partially open was all in a masked environment, you know, and had testing and vaccinations. They de-densified dorms to the tone that only 30 to 50 percent of the design capacity was occupied as people figured out what the whole thing was, and questions kept coming up. Oh, my gosh, our developers and universities will start designing buildings differently. 

We had an issue where, at San Diego State, they closed 75 percent of their dorms because they had gang bathrooms at the end of the hall, and they couldn’t figure out how to distance themselves in gang bathrooms, right socially? And did that say, will people be building things without gang bathrooms? And what we’ve not seen post-pandemic is our gigantic movements or changes.

It’s been a reversion to the mean and a back-to-back normal. A couple of things I can say that I’ve seen as trends that I think will continue is that COVID exacerbated an already existing challenge amongst youth with mental health issues, and those mental health issues are real.

Universities have to deal with mental health services. So health services used to be more about you pick it, you get the flu, you get a cold, you get a venereal disease, whatever it is, and you’re in the health services department or office at the university.

Today, mental health issues are gigantic, and they’re here to stay. Universities need to deal with them, and they got exacerbated because of the stress during COVID-19. And so that’s now real and here to stay and including—evolution of curriculum, you know, in mental health counseling. So we’ve even got more professionals that can go into that field. The other that I think is here to stay is hybrid course delivery.

And if you compare K12 education, which was wholly inadequate. In being prepared to convert to online course delivery, whereas most universities already were doing some form of distance learning or online learning, you know, education. So, they had the infrastructure in place. So when they pivoted, it’s not like it was perfect, but it was pretty darn good. And so now what we’re seeing is universities reevaluating the delivery of courses and seeing it. And I think it’s rather than going entirely online, which would be a mistake. Students don’t like it. The quality of the educational delivery is different from in-person. I don’t see that taking over the world. 

I see distance learning as 100 percent of the way a course is delivered is simple. It is expanding access to higher education for people in remote areas who can’t get to a physical location and still want to have education or non-traditional students, older students, and re-entry students, where that’s got to be the delivery mechanism for them.

But hybrid delivery is different. It’s where part of the course is online, and part of the course is in person and, at the university that I chair at Franklin Pierce, we’ve got a cutting edge program in our doctor of a physical therapy program, you know, where some of the stuff that’s just done in a classroom can now be done remotely, and other clinical parts of the program have to be done in person.

And so we’ve got a hybrid model, approved by our accrediting agency, that’s on the cutting edge, and it’s trendy amongst the students, you know, who can maybe stay where they live and not have to relocate during some of their classroom instructions and then go to the campus center when they need to do clinical work or other work in the classroom that you can’t do remotely. So I think that’s an interesting one. We also do that, you know, I’m on the board at, uh, at, uh, the wine business Institute at Sonoma State University, and we have a wine MBA where a cohort spends a couple of weeks in Sonoma, a couple of weeks in Adelaide, Australia. And a couple of weeks in Bordeaux, France, you know, in the field with wineries, the warning, you know, incredibly, and then the course room instruction can be done online.

And so it’s a hybrid delivery. It’s, it’s the same course with both in person, in that case of travel as well. I think that came out of COVID, where the capability of universities was honed even better. And I think they’ll find better ways to deliver courses most efficiently and engaging for students.

SHURE: What is the trend with on-campus real estate decision-making at the university stakeholder level? Are you finding universities continuously moving to a property trust model? Is real estate, professionally managed, or going in some other direction? If so, what is the real estate entity at those universities?

FP: Generally, I don’t think there is a singular model of the structure of the kind of entity that it’s in. It has to do with—local politics, expertise, philosophy of boards and university presidents.

The common denominator continues to be that the real estate function is sophisticated. It is essential. It’s a, it’s hugely important. It’s, it’s almost like saying, you know, is McDonald’s a burger company, or are they a real estate company? McDonald’s is much more a real estate company than they are necessarily a restaurant and university.

Nowadays, they’re big-time real estate operators, but they do it through different models. And I don’t think that the model is what matters, but the fact is that the university wants to manage it. They want to control it.

And by example, I had mentioned an off-campus, a new campus of San Diego State, the Mission Valley campus. And here’s one example of what they’re doing. They are master ground leasing parcel blocks to developers to build apartment buildings, conventional apartment buildings. In exchange for ground lease revenue, however, they will have multiple blocks that will be mixed-use projects with ground-level retail, and the university wanted to control the retail. They tried to control the tenant mix. So, unlike being in an urban or a downtown area. We’re different developers who own other blocks, and there’s no synergy per se in the merchandising strategy of the retail. It’s whatever they can fend for themselves here—the university, in this case, through its Aztec shop’s affiliate.

That’s not the important part, but that’s who handles all of their their retail leasing, whether it’s on campus. And the campus owns its own Starbucks franchise, or whether they have a food court with multiple, you know, tenants in their food court. Well, they’ve got experience in doing that. So they’re master leasing all of this ground-level retail space back from the developers, and then the university is subleasing that so they can control the merchandising plan.

And so that’s just one example of how the university can keep control and still have a deal that makes economic sense with ground leases. So, this is just an interesting case study of how one university is trying to control the retail storefronts in something where private developers will run the housing question.

SHURE: Is it your opinion that universities are looking to become more active landlords and engage with the cities and their municipalities?

FP: This has been a multi-decade trend where universities have wanted to control the environment surrounding them.

And the more urban they are, the more critical this activity is so that they’ve got a real estate office that, before the definition of a university real estate office 25 years ago, would be that they would accept gift real estate. So, if a law or a benefactor wants to donate a piece of real estate, the university would take it and then turn around and sell it because they just wanted the money from it. Right? It was a donation. And they would deal with it if they had to lease space off-campus. Maybe they’ve got a satellite program offering adult education, and they want to be in a downtown area.

They need to lease a building or a part of a building. And that was what the real estate office did. Today, more and more and more, the real estate offices are also taking on specific off-campus acquisitions in the sphere of influence of the university and land banking the real estate until they can get enough contiguous parcels assembled, where they can then undertake projects.

And so, the University as Real Estate Developer - there’s even a book called The University as Real Estate Developer by Dr Vim Vivo. Uh, he used to be the president of Portland State. So, yes, this has been going on for decades, but it’s an essential activity of universities now to be active real estate entrepreneurs and acquirers.

SHURE: Are you seeing any significant big-picture trends with enrollments in the U. S. overall, across the country, and by region?

FP: I’m glad you asked this question because I think this is misunderstood. Um, because it’s being looked at at the super macroeconomic level, at the 30,000-foot level.

By way of example, in the U. S., between the years 2000 and 2010, that decade of the first decade of the new millennium, enrollment in US higher education grew by 38%, so an average of 3.8% a year. That was an enormous enrollment growth. Then, with K, the echo of the baby boom is what they were calling it.

The kids of the baby boomers had reached college-going age. And, the preponderance of our female population going to college surpassed males. So, today, a higher percentage of females go to college than males. And back in the 70s, it was the exact opposite.

You may have had a quarter to a 3rd of the female population going to college and 70 percent of the male population. Now, the male population is in the high 60s, and the female population is in the 70s regarding their percentage college-going rate. So, there are some significant demographic changes and college-going changes.

But the big one now is that enrollment was essentially level in the United States between 2010 and 2020. So after enormous growth, it leveled off, and now you’re hearing projections of what they’re calling an enrollment cliff, and they’re saying that enrollment will start to decline in the US. In the next several years, while that does match what’s going on with K-12 enrollments and, therefore, what the high school graduation rate will be, what it’s produced in higher education are the haves and the have-nots, and the most selective universities control their destiny. So those could be everything from the Ivy League schools and elite private institutions to significant power five football conference division one public, higher educational institutions; their enrollments and applications are off the charts. And so when you’re seeing, even in the last couple of years, the enrollment trend, a segregated, you’ll find that the most selective has been growing.

The least selective has been shrinking, and that will continue where the most selective, in my opinion, will continue to have an insatiable demand for enrollment admissions and some other universities that are not very selective and maybe in areas where the demographics aren’t so great, could even face extinction. You’re seeing some small private universities going out of business because they can’t maintain enrollment. That’s okay. Attrition in almost any industry can be healthy. You don’t want it to be status quo, but there is a big difference in selectivity in the US and in what the enrollment outlook is.

SHURE: We have been hearing stories about the use of real estate changing post-pandemic. Social trends, such as ordering online and package delivery, have accelerated, with students spending less time in common areas, such as the dining hall. Is this a trend you are seeing, and will this warrant a new way of designing properties in the future?

FP: My answer is I don’t think it’s going to be a gigantic change in the way property is developed in the future. I do believe that what we saw in the pandemic was that students were forced to distance themselves in the early stages of the pandemic. They came rushing back to college that next fall, and the same happened to kids who lost out on a big chunk of their high school experience because they couldn’t be in the classroom, and they couldn’t do activities with their friends, missed their friends, and, and, and while yes, kids today are on social media like they’ve never been before, they might be together at a restaurant and talking to each other on their device.

If you know what I mean, instead of looking each other in the eyes and talking, we’re seeing the desire to congregate and get back together. Things like fraternity and sorority life are in an all-time boom regarding people wanting to join those organizations and be with others.

And we got through the pandemic. And, essentially, America’s youth was not impacted from a health perspective very much at all. If they got sick, they got slightly ill, like the flu. You weren’t seeing much of the youth in America dying because of COVID.

And frankly, in my judgment, there’s much confusion about the phenomenal number of people who died during COVID-19. Most were from preexisting conditions. Most were our elderly, which exacerbated the condition that they already had. It was super unfortunate, but you know, but the youth is not afraid to get together with people because of what they experienced in COVID, maybe the antithesis, they want to get back together, so I don’t think you’re going to see any significant changes in construction. Perhaps you’ll see some in HVAC systems where there will be spec so that they control the airflow in a more medically safe way. Because you can build that into infrastructure, I can see some of that will not be visible to somebody in a building. As you see, the amount of amenity space changed because we do not know that change due to the pandemic.

SHURE: Let’s talk about university planning in mainstream news. What are your thoughts on recent federal measures like student loan forgiveness?

FP: I’ve got very strong feelings and views about that. And what I can tell you is that that what’s in the headlines and the fear mongers that are out there projecting a crash in the stock market and a crash in the real estate market because people are going to have to start paying the student loans that they’ve had forgiveness on for the last handful of years.

You hear numbers like this: the U. S. outstanding balance of student loans is 1. 75 trillion, not billion, 1.75 trillion, and about 55 percent of college graduates, at least at public universities, graduated with with student debt. Those figures can sound daunting when you look at them. But, let me put it this way: pre-pandemic 2019, the stock market was the highest it’s ever been in the United States, and the housing market was the strongest it’s ever been.

And guess what? All those people and there are 46 million of them that comprise that 1. 75 trillion. They all have that student debt, then. They were still making student loan payments then, and the markets didn’t crash. So this is, to me, all political rhetoric, and it’s people running for office at the federal level, including for the presidency, thinking if they can get some measurable number of those 46 million people, who, by the way, their average loan balance is about $29,000.

There is $29,000 of debt at a weighted average interest rate in the high 4 percent range, which is what the debt rate has averaged over the last 15 years in the U. S. Do you think that’s changing someone’s decision to buy a house because they got $150 per month student loan payment? The answer is no.

What’s happened in housing? In the U. S., demographic changes and lifestyle changes are such that America’s youth, young adults in their 20s and early 30s, have deferred buying a house. They did it before the pandemic, and they did it not because they had student loans but because of the old style of maybe getting married in your late 20s, starting to have kids, and moving to the suburbs; they want to live in urban America.

They want to live in the city where there are restaurants, and it’s more expensive to rent rather than buy, maybe, a less expensive house in the suburbs. They’re renting by choice in America’s urban areas. And that’s their lifestyle. That’s what they want to do. It has nothing to do with that student loan balance.

So there’s misinformation that’s out there. And I think it’s because people latched onto the fact that if they told someone they would wipe out their debt, maybe some people would vote for them because of that. But the implications and the prognostications are nonsense. It’s not going to crack. The only thing that will impact us now and well into the foreseeable future is the economy and the housing market.

I refinanced my mortgage on my house in February of 2022, and I locked in an interest rate of 3.125%. If I were getting that mortgage now, that would be an interest rate over 7 percent – now that’s impacting buying power.

It’s not a student loan and having to pay back a student loan. It is interest rates and inflation and what the Fed does in the US to the underlying interest rate indices. That’s what’s impacting what’s going on. It’s not student debt.

SHURE: Should the federal government be involved in post-secondary education, and what could it or should it be doing differently to support students or their academic institutions?

FP: The federal government should do what it has been doing for decades, and that is to make subsidized student loans available. What’s interesting is that the cost of going to college, tuition, and room and board over the last 20 years has skyrocketed, right? It has grown well above the rate of inflation. Do you know that the average student loan debt balance in the previous 12 years has decreased slightly?

So after the 15 years before that, where student debt grew and went from the low $10,000s range to the $29,000 range, it stayed at that $28,000 range for the last 12 years. While the cost of education has been increasing, I don’t know, and in some places, they’re saying 7 percent a year. So, if you think about that, that model is working. We’ve still got strong enrollments, especially at the best institutions.

So, what the government needs to do is continue to make federal financial aid available. But what they should not do is make those loans and then willy-nilly wipe them away. That’s not fair to society. That’s not fair to the people who paid their student loans off.

These people take, and again, the average balance is twenty-eight to twenty-nine thousand dollars. They’re going to get a million dollars in lifetime income, you know, back for that college degree. That’s an excellent investment for our federal government to help make that available, But we shouldn’t give that away, you know, we should hold the people to what they borrowed.

And, let them take it from all that extra money they’re going to make and pay their loans off. But making student loans available undoubtedly needs to happen because we have more first-generation college students than ever. The stat I saw was that 42 percent of the current enrollment at American higher education is our first-generation college students, many of whom are coming from lower-income families. We need to make sure they’ve got the resources to be able to finance their college education.

SHURE: Finally, let’s talk about your business, PEP. Describe the current portfolio. Where are you now? Total number of units, total number of beds. Total number of assets?

FP: In 2021, we divested 10,000 beds, and, you know, looking in the rear-view mirror, 2021 was an excellent year to be a seller. We divested 10,000, but we’re growing again. So, we bought four properties last year. We bought two at Clemson, one at the University of Georgia and one at Iowa State. Uh, we’re in ESCO on a substantial purchase of two properties at a hefty ten university in the Midwest.

We’re about to launch our first-ever commingled fund, which will be for a modest size. So, these will be for purpose-built student housing properties of $10 to $40 million. They’re going to be value-added opportunities. So, a lot of acquisition rehab, and also some operational turnarounds, and they will be at public universities with 20,000 minimum undergraduate students. Or 25,000 or more total students at the Power 5 football conference universities or a group of 5 universities in the football context if they’re in a central metro area. So, Orlando, Tampa, or San Diego – big urban real estate markets with a San Diego State or University of South Florida or University of Central Florida, those markets or a power 5.

And that’s, that’s where we’re going. And, we’re expecting we’re probably going to raise about $100 Million that, will give $300 million of investment power because we’re going to get 65% leverage, and we’ll be going to those markets. We expect that in probably 18 months, maybe two years’ worth of investment volume for us, and then we’ll probably have a follow-on fund.

SHURE: Are you seeking investors? Are you seeking LPs? What are your terms?

FP: The fund that’s being marketed is being marketed to family offices. And for those that don’t know that term, that is where it’s an uber-wealthy, usually billionaires, that choose to manage their investment portfolio by hiring staff that work for them and not giving their money to a Wall Street investment house. So that’s called a family office, and they manage their own money or through registered investment advisors with clients. They have portfolios of clients who are accredited investors, meaning sophisticated high-net-worth investors. But through those registered investment advisors, they’ll aggregate their clients. So maybe a single office that is of an investment manager might aggregate, you know, $1 to $5 million of investments for their clients, maybe at $100,000 and $250,000 and 500,000 at a pop, they’ll go in. So it’s through those two channels is the way we’ll be, but it will ultimately be individual investors with, you know, investments as low as $100,000.

We will still have our limited partner relationships with institutional investors. Those are going to focus on our more significant transactions, right? So, properties we buy that are more than 40 million dollars, and those big institutional investors have much capital to deploy. And they like to acquire even more significant assets.

So it’s a good lineup of sort of who the profile of the investors are with what the size of the investment properties are. So we’ve got it aligned kind of in that way. So, the commingled fund minimum investment of $100,000.

SHURE: And then what do you expect the hold period to be? Or is there a minimum hold period as well?

FP: It’s a two-year investment period, a five-year hold, and then a divestiture period. Um, you know, we’ll probably sell early on assets. We’ll sell, you know, we’re not going to hold them all, although. There could be some value to be gained from a portfolio, a homogeneous portfolio that could be sold at a premium.

So we’ll be evaluating that, but something we buy in 2024, you know, we may be selling in 2029 by way of example, liquidating those because we’ll have executed the business plan. We’ll buy it, implement a value-added business plan, and stabilize it. And then likely sell the asset.