A looming schools shortage?

As our population grows, so too will demand for school places and new schools. This is going prove a significant driver of demand for space - especially in suburban centres. But first, old thinking about schools needs to change to allow for the opportunities that the future presents and to avoid an inevitable shortage of places in suitable locations.

First, some quick numbers. There are just over 25 million Aussies in Australia. Of that, some 4,030,717 were school age students enrolled in 9,581 schools. Based on that ratio, every extra million people (as for example predicted for each of our major capitals in just a few short years) will mean an extra 160,000 students. At a rough average school size of 400 students, that’s another 400 additional schools for each million of extra population.

In South-east Queensland, official forecasts suggest another 1.5 million people by 2041, which is another 240,000 school age kids in need of an additional 600 schools. That’s the equivalent of 31 new schools in SEQ each year for the next couple of decades.  Sydney and Melbourne will face similar predictions.

It’s not just students. The education sector is a major employer. It employs 1.153 million people nationally, 62% of whom are full time workers. That’s nearly one in ten of the national workforce.

It’s also the third fastest growing industry in the country, predicted to add another 150,000 jobs in the five years to 2026. Some 93% of those jobs will be in suburban places. (The fastest growth industry of all in health care and social assistance, of which 90% will be based in suburbia while professionals are second fastest with three quarters outside inner cities). The figures in red in the graph below show the percentage of these jobs in suburban areas, against the numbers of new jobs predicted (in blue).

Of those education jobs, the majority will likely be in school age education, based on current shares:

Government schools account for 65% of enrolments while Catholic schools account for 19.5% and independent schools for 15.4%. In the independent schools area, there are a plethora of smaller schools providing for particular faiths, cultures, learning needs or other specialisations. For example, more than half (54.6%) of the independent schools in Queensland have enrolments of under 500. One in ten have enrolments of less than 50, and a further one in ten enrol between 50 and 100. One in five have enrolments of 500 to 1000 and only 6% had enrolments above 1500.

So, it’s a very big industry which is growing fast in line with predicted population growth. It is going to need additional school places and many more new schools, and nearly all of these will be in suburban locations. Not all will be large schools though, many with smaller space needs. How do we meet this demand? How do find the sites?

The traditional school model that comes to mind is the large primary or secondary school with a cluster of low-density buildings and its own sporting fields. In most suburban areas slated for infill (to absorb increased population) there simply are not sites of this size anymore. The government sector is struggling to find new sites for traditional school models – even resorting to proposing they are built in known flood areas.

There are possible exceptions. For example, oversized carparks provided for at new train stations could easily accommodate a modest sized school. Being next to a train station for students and staff is both logical and appealing. In the absence of hordes of commuters embarking at outer suburban stations destined for CBD offices, why not use the infrastructure as a disembarking point for school kids? This will require new thinking – something we’re not good at. (The example below is Murrumba Downs station on the relatively new Redcliffe Peninsula line, with ample room for a school).

Repurposed industrial land also presents a similar opportunity (once any hazardous contaminants are safely dealt with). Many industries have moved out from older style areas with narrow streets and smaller buildings to new industrial estates with b-double friendly road and transport networks and buildings designed to meet contemporary needs. The legacy sites can struggle to find new uses beyond low-grade storage. A wide mix of uses - education included - should be on the list of future possibilities. 

However, in most cases infill school sites are near impossible for the traditional large school + playing fields format. There is no reason however why any number of existing suburban centres – especially those near transport infrastructure, cannot be re-imagined. Vacated big box department and discount department stores offer ample space for modestly sized schools, potentially integrated into the shopping centre. They are typically well located, provide ample parking, are near public transport and have traditionally hosted intensive uses. The term ‘shopping centre’ has passed its use by date anyway; they are more like community centres now, for which uses like health and education make much sense. This is being done in the US, and there’s no reason it can’t happen here, other than planning flexibility, political will and industry intelligence (all three of which are often sadly lacking).

New mixed-use projects and entire renewal precincts could equally benefit from the activation that a school provides. Remember, a school of 50 to 100 students isn’t a candidate for a standalone building with its own sporting fields or gymnasium anyway – they instead could be a tenant within a new or adaptive re-use project, making use of nearby parks or commercial gyms should the curriculum require it. Once again, rigid planning controls that limit the type of mixes allowed in a mixed-use project typically don’t include education by default – something else that needs to change.

Funding options too are not necessarily the obstacle that you might think. Given the ravenous appetite of capital and the sheer weights of money looking for sustainable long-term investments, there is no reason why institutions won’t enter the education sector as a long-term capital partner on the non-government side, (potentially even the government side if they could). Where a non-government school once needed to save capital to fund land acquisitions and building costs via generations of savings and fund raising drives, we may soon see a number of these schools enter into new campus arrangements funded upfront by institutions on very long-term lease back arrangements. Think it can’t happen? Have a look at how quickly funds have begun entering the private health space, funding its (largely suburban) expansion? Private capital is already partnering with the tertiary education sector to fund new campuses – why not schools as well?

The bottom line is that with population growth comes the demands of that population – and schools are at the top of the list, or very near it. Our traditional approaches to locating schools will have to change if infill strategies to soak up growth are to work. This will require some forward thinking from urban planners and policy leaders. Any delays will inevitably result in a shortage of spaces, with overcrowded classrooms and limited choices on the government side, and even more exorbitant costs as demand exceeds supply on the private side. We made a mess of the housing market by failing to plan ahead. Can we avoid doing the same to schools?

 

References:

Education sector profile: https://labourmarketinsights.gov.au/industries/industry-details?industryCode=P

Labour market profile: https://lmip.gov.au/default.aspx?LMIP/GainInsights/IndustryInformation/EducationandTraining

ABS Schools data: https://www.abs.gov.au/statistics/people/education/schools/latest-release#covid-19-in-this-publication

Independent Schools Queensland: https://www.isq.qld.edu.au/publications-resources/categories/research/

  

From factory to free-range offices. At a price.

Last week, leading Australia developer Mirvac called for an overhaul of what it called “outdated metrics defining office spaces.” The call was in response to new, hybrid modes of work and new workplace design in the wake of the Covid pandemic.

Mirvac is right to explore new office metrics. The current building grades categories, methods of measurement and methods of calculating vacancies and occupancies are little changed in decades. They have served the industry well enough but come from an era of factory mode office work, with workers dutifully lined up at their cubicles, all arriving at the same times and mostly leaving at the same times. Those days are gone.

To quote from the story in The Australian:

“(Mirvac head of integrated investment) Campbell Hanan argues for the need for a different system of measurement of office values as both the nature of work and what draws tenants to buildings has changed.”

“There’s a new paradigm coming now, which is all around experience, because there is a whole new adaptive way of work that’s happening,” he says.

“He cites British developer Sir Stuart Lipton’s remark that offices will go “from factory farming to free range”. This will prompt a change from a sea of workstations to more open, collaborative spaces, which should be recognised in building values.”

“He says tenants going into next generation buildings are focused on issues ranging from ESG concerns, employee experience, and post-pandemic concerns about air circulation and managing spare desks.”

No doubt he’s right. To attract key workers back, the new workplaces will feature building service upgrades embracing an array of embedded technology, HVAC and environmental features not seen in typical worker drone office buildings. There will be more outdoor spaces, garden terraces, lounges, recreation and exercise areas. The notion of offices with an average of 8m2 or 10m2 per person is gone from this new office nirvana. You are looking at more like 20m2 per person (a historic average by the way, before we let accountants define our workspace needs).

That space is also going to be costlier to build. Added to the recent general escalation in building costs, and developers of this new breed of office are going to need to do their sums even more carefully.

But it’s potentially worse for the occupier. A simple back of envelope comparison suggests the two big variables will be the fit out cost, and the number of people per square metre. If an occupier moves from a typical ‘A’ grade building with basic fit out and 10m2 per person, to a premium “new” design for the post covid world with much higher fit out costs and fewer people to the square metre, it is conceivable that real estate costs per person could nearly triple.

(No, in this example no allowance is made for post-tax fit out depreciation or rental incentives or other deductions. Fit out is simply divided by 6 on a six-year lease basis, as many tenants are reportedly looking for shorter, more flexible terms. Very basic and hypothetical numbers for illustrative purposes only).

 

How will the market respond to this? Would traditional “paper factory” tenants with legions of administrative and support staff be comfortable with a real estate cost per person that is close to half the salary of many of its workers? Or would they elect to split their workforce into the “worthy” higher value employees for the new CBD premises, while admin and support staff are encouraged to continue working from home, or from a distributed low cost hub?

Does it mean a likely bifurcation of the market, as predicted by Mirvac’s Haan who said “We’re going to need to value it because there will come a time when some buildings which offer unique experiences compared to others, are going to attract valuation premiums.”  Which also means lesser buildings will be discounted.

In turn, does that mean new opportunities for tenants to negotiate rents in less prestigious buildings, leading to lower occupancy costs for a wider cross section of CBD occupiers who are content with the older style office factory. Is the problem here that while the older style low-cost office may appeal to the business, it may not appeal to that business’ workers?

The magnitude of changes are hard to get your head around. Reluctance to return to the pre covid mode of work seems – for the time being at least – unlikely to change. Bloomberg City Lab reported this week that: “The average New York City office worker intends to reduce time in the office by 49% and slash annual spending in the city by $6,730, down from an estimated $12,561 before the pandemic, according to Nicholas Bloom, an economics professor at Stanford University.”

(There is a good PowerPoint on the latest WFH research by Stanford Professor Nicholas Bloom, which you can find here).

Meanwhile, on the west coast USA, Apple workers are reportedly rejecting mandates to return to their $5 billion new, futuristic, purpose built headquarters in Cupertino. That mandate is hardly intimidating. According to New York Post, “Apple CEO Tim Cook is ordering all corporate employees back into the office at least one day per week beginning on April 11. The mandate ratchets up to two days per week on May 2 and three days per week on May 23.” But that’s enough for some to exclaim: “I don’t give a single f—k about ever coming back to work here…  I’m going to go in to say hello and meet everyone since I haven’t since I started and then sending in my resignation when I get home,” the employee wrote. “I already know I won’t be able to deal with the commute and sitting around for 8 hours.”

All this seems to point to CBDs becoming even more conspicuous as places for the high-end professional class, who (by virtue of living closer to the CBD in higher price housing) already enjoy shorter commutes than the worker drones, and who may also soon be offered more lavish workplaces to entice them back to work in even more highly valued buildings. Meanwhile, reluctant worker drones who once spent hours commuting to a computer screen in some anonymous cubicle, may rarely venture back. CBDs, which were once intensely active centres of employment for everyone from lowly clerks through to managing directors, may become even more concentrated centres of privilege and power. No more factory hens but instead free-range chooks. Plus an awful lot of roosters?

Comedy can be a great tool in drawing out the irony of changes like this. This British sketch is a pearler.