CBRE FloridaAugust 2014Global Research and ConsultingNEW REGULATIONS MAY CAUSE FOR-PROFIT COLLEGES TO REDUCE THEIRFOOTPRINT IN FLORIDA’S REAL ESTATE MARKETSby Q uinn EddinsDirector, Research & AnalysisINTRODUCTIONIn recent years, the ranks of office and retail tenants inFlorida have expanded to include for-profit educationalinstitutions. Today there are at least 28 for-profit colleges inthe state occupying more than 4 million sq. ft. of space inmulti-tenant buildings, most of which is concentrated in ahandful of cities. The U.S. Department of Education (DOE)has proposed regulations that could have an extremelydetrimental impact on the bottom line of these schoolsif they are deemed to have failed in their obligation toprepare students for gainful employment. Failing schoolswill likely be forced to reduce staff and vacate operationallocations and instructional centers, which in turn could drivedown absorption and increase vacancy in the commercialreal estate markets in which they are located.PROPOSED REGULATIONSFor-profit colleges are a multibillion-dollar business in theUnited States, and one that relies heavily on money fromthe federal government for its health and profitability.According to a study of 30 major non-profit educationcompanies by the Senate Committee of Health, Education,Labor and Pensions, 79% of the revenue generated by thefirms in 2010 came from the federal government in theform of federal student aid.1 In 2010 alone, 32 billion infederal aid flowed into for-profit colleges.Over the last several years, the DOE has grown increasinglyconcerned about the practices of for-profit colleges. Onereason for the concern is the poor record of for-profit collegegraduates 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 trainingthat prepares students for gainful employment. However,according to the senate committee’s study, many graduatesof for-profit colleges are unable to find employment in theprofessions in which they have been trained, or they findemployment at low wages that leave them struggling tomake payments on their student debt.In an effort to help ensure better outcomes for students atfor-profit colleges, U.S. Secretary of Education Arne Duncanhas proposed to amend the regulations on institutionaleligibility for federal student aid programs under TitleIV of the Higher Education Act of 1965. The proposedamendment would establish measures for determiningwhether these institutions prepare students for gainfulemployment in recognized occupations, and the conditionsunder which these educational programs remain eligiblefor federal student aid. Underperforming institutions willforfeit their access to tax-payer-funded student aid.Under the proposed amendments, institutions will berequired to publicly disclose information about programcosts, debt, and post-educational students outcomes.Programs would be deemed “failing” if loan paymentsof typical graduates exceed 30% of discretionary incomeor 12% of total annual income. Programs will be givena warning if students’ loan payments amount to 20% to30% of discretionary income, or 8% to 12% of total annualincome. Discretionary income is defined as above 150%of the poverty line and applies to what can be put towardnon-necessities.The DOE issued a similar rule in 2011, but a judge struckdown most of it following a lawsuit by an industry grouprepresenting for-profit colleges. However, the judge upheldthe DOE’s authority to regulate career college programsand urged them to try again, next time providing a clearerjustification for the metrics it uses to assess institutions’FOR PROFIT HIGHER EDUCATION: The Failure to Safeguard the Federal Investment and Ensure StudentSuccess, Committee on Health, Education, Labor, and Pensions United States Senate, July 30, 2012.1 2014, CBRE, Inc.

performance. Since then, the DOE has revisedits amendment, and as of July 1, intends tomove forward with implementation of therevised regulation in 2015.If implemented, the standards proposed in theamendments would not take effect immediately.The provisions allow institutions a few years toimprove their programs and to ensure that thoseimprovements are reflected in their evaluations.IMPLICATIONS FOR REAL ESTATEFlorida markets are already seeing the impactof the proposed regulations. At least three majorinstitutions have reduced their office footprintas a result of the initial regulations proposedin 2011. Kaplan University vacated about46,000 sq. ft. in Boca Raton over the past twoyears; consolidated operations at several otherlocations in Fort Lauderdale, Cypress Creekand Plantation; and is no longer enrolling newstudents in Jacksonville. These actions were adirect result of declining student enrollments,thus forced staff reductions, due to adjustmentsin business operations for compliance withDOE regulations. Everest University andUniversity of Phoenix have also seen significantstaff reductions and campus closings as aresult of the proposed amendments. In 2013,Everest University consolidated its space in FortLauderdale and University of Phoenix vacated15,000 sq. ft. in Daytona and terminated alease early in Palm Beach Gardens.As shown in Figure 1, Everest University occupies577,808 sq. ft. of commercial real estate inFlorida, more than any other for-profit institution.The majority of this space, 97%, is concentratedin the Miami, Tampa, Jacksonville, Lakeland/Winter Haven, and Orlando metropolitan areas.Everest University is owned by California-basedCorinthian Colleges, Inc., which the DOE placedon “heightened cash monitoring” status in June2014. A July 2, 2014, SEC filing submitted byCorinthian outlines the drawdown of financialaid funds, cessation of student enrollment andthe sale of 85 schools nationwide within the next six months. Thelist of schools for sale includes 10 Everest locations in Florida.While it does not appear imminent that Everest University will shutdown, due in part to the DOE’s desire to protect current students,the recent regulatory actions highlight the tenuous position of theinstitution and the risk to Florida’s commercial real estate markets.While the total footprint of for-profit colleges in Florida accountsfor only a tiny fraction of the rentable area in the state, downsizingon the part of these space users could have an outsized impact onthe markets in which they are concentrated. Office markets areFigure 1: For-Profit Institutions in Florida, Enrollment DetailsRank InstitutionCampus LocationTotal RBAEnrollmentFSL Aid %*1EverestVarious577,80850,76987% to 100%2Full Sail UniversityWinter Park45,00023,49775%3Ultimate Medical AcademyVarious55,16212,80761% to 76%4Florida Career CollegeVarious319,6705,79391% to 97%5Art InstitutesVarious265,8885,75687%6Rasmussen CollegeVarious112,1485,74892%7University of PhoenixVarious290,7235,25290% to 98%8ITT Technical InstituteVarious284,7624,22456% to 91%9Florida Technical CollegeKissimmee69,9943,79095%10DeVry UniversityVarious248,6993,74290%11Fortis CollegeVarious269,4283,55158% to 100%12Universal Technical InstituteOrlando56,6473,39182%13Strayer UniversityVarious174,5083,23436%14Beauty School of AmericaMiami55,7002,77076% to 95%15Florida National UniversityVarious71,2862,50682%16Le Cordon Bleu College of Culinary ArtsOrlando126,7312,48487%17International Academy of Design andTechnologyTampa/Orlando201,0082,45282% to 97%18Dade Medical CollegeVarious80,2192,27368% to 99%19South UniversityVarious41,8391,90791%20Concorde Career InstituteVarious129,1841,88781% to 88%21Sanford-Brown InstituteVarious229,9531,86792% to 98%22Argosy UniversityTampa/Sarasota42,0001,54750% to 63%23Southeastern CollegeVarious123,9771,53553% to 57%24Aveda InstituteVarious30,9611,34044% to 63%25Florida College of Natural HealthVarious83,9211,15354% to 87%Heritage InstituteJacksonville/Ft.Myers52,5021,01967% to 78%2627Brown Mackie College-MiamiMiramar56,5191,01691%28Kaplan CollegeVarious57,685*58% to 100%Total Sq. Ft.CBRE Florida ViewPoint: Regulatory Risk - For-Profit CollegesGLOBAL RESEARCH AND CONSULTING4,153,922List includes only schools with more than 1,000 students*Federal Student Loan Aid % New Undergraduates (2010-2011)** Predominately online enrollmentSource: CBRE Research, National Center for Educational Statistics (NCES), Q2 2014. 2014, CBRE, Inc.August 2014Page 2

particularly at risk. Across the state, 81% of the spaceoccupied by for-profit institutions is in office buildings,13% is in retail centers and 6% is in flex/industrialproperties, as shown in Figure 2.amount of office space occupied by for-profit collegesin these markets, the simultaneous loss of funding forthese institutions could wipe out positive net absorptionin all but the best of quarters.The office markets in Fort Lauderdale, Miramar, Miami,Orlando, Tampa and Jacksonville are particularlyvulnerable 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 andconsolidation of for-profit colleges could impact thebalance of supply and demand in these markets. Asshown in Figure 3, the total amount of office spaceoccupied by for-profit colleges in these markets ishigher than the net absorption in nearly every quarterover the last three years. As the new regulations willpresumably take effect for all for-profit collegessimultaneously, multiple colleges could lose access tofederal student aid at roughly the same time. Given theLooking ahead, it will be important for commercialreal estate professionals to be aware of the impendingregulations for this particular class of occupier in orderto anticipate vacancy or gauge tenant quality. It will alsobe important to bear in mind future downsizing andconsolidation of for-profit colleges when interpretingtrends in vacancy over the next several quarters. Suchconsolidations may inflate vacancy figures, but as theyreflect government interventions affecting a very specifictype of user, they will not necessarily reflect widespreadweakness in demand for commercial real estate space.CBRE Florida ViewPoint: Regulatory Risk - For-Profit CollegesGLOBAL RESEARCH AND CONSULTINGFigure 2: For-Profit RBA per type and MSAMSAFor-Profit RBA (SF)MSA For-Profit RBA as %of State RBAOfficeRetailFlexMSA TotalMiami-Ft ampa-St. sonville328,90552,189450,83310.9%Lakeland-Winter 1,0461.2%Cape Coral-Ft. MyersPensacola-Ferry Pass-BrentN a-Ormond35,44435,4440.9%Port St. ,044Ocala23,63623,6360.6%Palm 00.0%Grand Total3,348,355558,878246,689Sources: CBRE Research, National Center for Educational Statistics (NCES), CoStar, Q2 2014. 2014, CBRE, Inc.August 2014Page 3

FigureCollege3: For-ProfitCollegeOffice Spacevs. Quarterly Net AbsorptionFigure 3: For-ProfitOffice Spacevs. QuarterlyNet AbsorptionOffice Space Occupied by For-Profit Collegesin Q2 2014 (000’s of sq. ft.)Quarterly Net Absorption (000’s of sq. ft.)Fort 004003002001000-100-200Q1 '13Q3 '13Q1 '14Q1 '13Q3 '13Q1 '14Q1 '13Q3 '13Q1 '14Q3 '12Q3 '12Q1 '12Q3 '12MiamiQ3 '11Q1 '11Q3 '10Q1 '10Q1 '14Q3 '13Q1 '13Q3 '12Q1 '12Q3 '11Q1 '11Q3 '10Q1 '10-300Miramar400CBRE Florida ViewPoint: Regulatory Risk - For-Profit CollegesGLOBAL RESEARCH AND oQ1 '12Q3 '11Q1 '11Q3 '10Q1 '14Q3 '13Q1 '13Q3 '12Q1 '12Q3 '11Q1 '11Q3 '10Q1 '10Q1 00-100Q1 '12Q3 '11Q1 '11Q3 '10Q1 '14Q3 '13Q1 '13Q3 '12Q1 '12Q3 '11Q1 '11Q3 '10Q1 '10Q1 '10-400-200Page 4 2014, CBRE, Inc.August 2014Source: CBRE Research, National Center for Educational Statistics (NCES), Q2 2014.

CONTACTSFor more information about this Regional ViewPoint, please contact:Quinn EddinsResearch & Analysis DirectorFlorida ResearchCBREt: 1 305 779 3114e: [email protected] MansoorSenior Research AnalystFlorida ResearchCBREt: 1 954 331 1733e: [email protected] DrwiegaResearch AnalystFlorida ResearchCBREt: 1 813 273 8433e: [email protected] Florida ViewPoint: Regulatory Risk - For-Profit CollegesGLOBAL RESEARCH AND CONSULTINGFOLLOW CBREGLOBAL RESEARCH AND CONSULTINGCBRE Global Research and Consulting is an integrated community of preeminent researchers and consultants whoprovide real estate market research, econometric forecasting, and corporate and public sector strategies to investorsand occupiers around the globe.Additional research produced by Global Research and Consulting can be found at contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy,we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracyand completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved andcannot be reproduced without prior written permission of the CBRE Global Chief Economist. 2014, CBRE, Inc.August 2014Page 5

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