Harvard Case - Back to School: Real Estate Development of Off-Campus Student Housing
"Back to School: Real Estate Development of Off-Campus Student Housing" Harvard business case study is written by Craig Furfine. It deals with the challenges in the field of Finance. The case study is 18 page(s) long and it was first published on : Dec 4, 2014
At Fern Fort University, we recommend a strategic approach to developing off-campus student housing that combines financial analysis, risk assessment, and market research to ensure profitability and sustainability. This approach involves a phased development strategy, starting with a smaller, more manageable project to test the market and refine the business model before scaling up.
2. Background
Fern Fort University, a private university located in a rapidly growing suburban area, faces a shortage of on-campus housing. This presents an opportunity for private developers to build off-campus student housing to meet the growing demand. The case study focuses on two developers, John and Mary, who are considering investing in this opportunity. They need to determine the feasibility of the project, considering factors such as market demand, construction costs, financing options, and potential risks.
3. Analysis of the Case Study
Financial Analysis:
- Market Demand: The case study suggests a strong demand for off-campus student housing, evidenced by the high occupancy rates of existing properties. However, a thorough market analysis is needed to determine the specific demand for different types of housing, price points, and amenities.
- Construction Costs: John and Mary need to carefully estimate construction costs, accounting for potential cost overruns and inflation. They should also consider the availability of skilled labor and materials in the area.
- Financing Options: Exploring various financing options, including debt financing, equity financing, and private equity, is crucial. They should consider the cost of capital, debt-to-equity ratio, and the impact of different financing structures on profitability.
- Return on Investment (ROI): John and Mary need to conduct a thorough financial modeling analysis to project the potential ROI and assess the project's financial viability. This should include cash flow projections, break-even analysis, and sensitivity analysis to assess the impact of different scenarios.
- Risk Assessment: Identifying and mitigating potential risks is essential, including market fluctuations, construction delays, and regulatory changes.
Strategic Analysis:
- Competitive Landscape: John and Mary should analyze the existing off-campus student housing market, identifying competitors and their strengths and weaknesses. This will help them develop a differentiation strategy to attract tenants.
- Target Market: Understanding the specific needs and preferences of the target student population is crucial. This includes factors such as affordability, amenities, location, and safety.
- Growth Strategy: John and Mary should develop a long-term growth strategy for the project, considering potential expansion opportunities and the evolving needs of the student population.
4. Recommendations
- Phased Development: Begin with a smaller, more manageable project to test the market and refine the business model before scaling up. This will allow John and Mary to learn from their initial experience and adjust their strategy based on market feedback.
- Thorough Market Research: Conduct comprehensive market research to identify the specific demand for different types of housing, price points, and amenities. This will help them develop a product that meets the needs of the target market.
- Financial Modeling and Risk Assessment: Develop a detailed financial model to project the potential ROI and assess the project's financial viability. This should include sensitivity analysis to assess the impact of different scenarios and risk assessment to identify and mitigate potential risks.
- Strategic Partnerships: Consider forming strategic partnerships with local businesses, universities, or community organizations to enhance the project's appeal and create value for students.
- Sustainability and Environmental Considerations: Incorporate sustainable design and construction practices to attract environmentally conscious students and reduce operating costs.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: The recommendations align with John and Mary's expertise in real estate development and their understanding of the student housing market.
- External Customers: The recommendations prioritize meeting the needs of the target student population, including affordability, amenities, location, and safety.
- Competitors: The recommendations consider the competitive landscape and aim to differentiate the project through a unique value proposition.
- Attractiveness: The recommendations are supported by financial analysis and risk assessment, demonstrating the project's potential profitability and sustainability.
6. Conclusion
Developing off-campus student housing presents a significant opportunity for John and Mary, but it requires a strategic approach that combines financial analysis, risk assessment, and market research. By following these recommendations, they can increase their chances of success and create a profitable and sustainable business.
7. Discussion
Alternative Options:
- Joint Venture: John and Mary could consider forming a joint venture with a university or a student housing company to share the risks and resources.
- Public-Private Partnership: They could explore a public-private partnership with the university or local government to secure funding and support for the project.
Risks and Key Assumptions:
- Market Fluctuations: The demand for student housing may fluctuate based on economic conditions and university enrollment trends.
- Construction Costs: Construction costs can be unpredictable and subject to inflation and material shortages.
- Regulatory Changes: Changes in zoning regulations or building codes could impact the project's feasibility.
8. Next Steps
- Conduct Market Research: Complete a thorough market analysis to identify the specific demand for different types of housing, price points, and amenities.
- Develop Financial Model: Create a detailed financial model to project the potential ROI and assess the project's financial viability.
- Secure Financing: Explore various financing options and secure funding for the project.
- Partner with Stakeholders: Establish partnerships with local businesses, universities, or community organizations.
- Develop Construction Plans: Finalize the design and construction plans for the project, incorporating sustainability features.
- Obtain Permits and Approvals: Secure the necessary permits and approvals from local authorities.
By following these steps, John and Mary can move forward with the development project with a clear understanding of the market, financial risks, and potential for success.
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Case Description
Christopher Lenard and his longtime friend Kimberly Slater are exploring the idea of developing a student-housing complex near the University of Wisconsin, Madison, by replicating Slater's highly successful, similar development near the University of Florida. Madison seemed to present attractive market and demographic conditions for investment in student housing in the summer of 2012. But before committing a large share of his personal wealth to the project, Lenard needs to conduct a more careful analysis of its potential risks and returns. By putting themselves into the shoes of a budding real estate entrepreneur, students will evaluate both the merits and pitfalls of various approaches to the financial analysis of real estate development projects.
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