Housing market rebound helps boost sales at retirement communities and spurs new development
By Jane Adler
Ever since the downturn, the seniors housing industry has bumped up against a basic reality: If seniors can’t sell their primary residences, or prefer to wait until home values rebound, they’re probably not going to move to a retirement community.
Luckily for the industry, a new reality is taking shape as the housing market continues to recover. Occupancies at seniors housing properties are rising. Sales at continuing care retirement communities (CCRCs) are gaining momentum, too. New CCRCs are opening, and a round of new projects is being planned.
The housing recovery is somewhat uneven, however. Some markets are rebounding quickly, spurring sales and leasing at seniors housing properties. Other markets are still playing catch-up.
“Seniors were on the sidelines for a while,” says Alan Butler, CEO at Baltimore-based Erickson Living, an owner and operator of CCRCs. “An improved housing market is giving seniors confidence to move.”
U.S. home prices have been steadily improving. The most recent S&P/Case-Shiller Home Price Index, a leading measure of U.S. home prices, shows that the 10-city composite price index increased 13.8 percent year-over-year, based on data through November 2013. The 20-city composite price index showed a year-over-year gain of 13.7 percent.
The biggest price gains were in Sun Belt cities, including Atlanta, Las Vegas, Los Angeles, Miami, Phoenix, San Diego, San Francisco and Tampa. Some northern cities also showed solid gains, including Boston (9.8 percent), Chicago (11 percent) and Minneapolis (10.5 percent). Detroit is also recovering, but is the only big city with prices below the level in 2000.
Seniors housing occupancies are rising. According to the most recent report by the National Investment Center for the Seniors Housing & Care Industry, the average occupancy rate for seniors housing properties in the fourth quarter of 2013 was 89.7 percent, an increase of 40 basis points from the prior quarter and up 70 basis points from a year earlier.
As of the fourth quarter of 2013, occupancy was 2.8 percentage points above its cyclical low of 86.9 percent during the first quarter of 2010. The occupancy rate for independent living is now 3.2 percentage points above its cyclical low, while the occupancy of assisted living is 2.5 percentage points above its respective cyclical low.
Erickson grows
CCRCs are taking advantage of the residential rebound. Erickson Living, for example, invested $100 million last year to build health care facilities at its campuses in Dallas; Houston; Overland Park, Kan.; Highlands Ranch, Colo.; and Northern Virginia. Nine new independent living buildings are also underway at seven Erickson campuses.
Erickson Living is expanding its portfolio of properties, too. The company manages 17 CCRCs and owns eight of them. Redwood Capital Investments owns the company. Last December, Erickson purchased the Devonshire at PGA National in Palm Beach Gardens, Fla.The purchase price of the property was not disclosed, though an Erickson representative says it was bought at a “significant” discount. The 15-year-old project includes 325 independent living apartments and a 100-unit healthcare facility.
The property had run into trouble during the downturn because of large debt obligations and a weak housing market. “Florida is a market we want to be in,” says Erickson’s Butler.
Meanwhile, South Florida home prices have continued to rebound. The Standard & Poor’s/Case-Shiller home price index for Palm Beach, Broward and Miami-Dade counties rose 16.5 percent in November from a year ago. The median sales price for a single-family home in Palm Beach County was up 15 percent year-over-year in December to $265,000, according to the Realtors Association of the Palm Beaches.
Erickson has plans to make capital improvements to Devonshire. Also, Butler thinks seniors will be more likely to buy into a community without a lot of debt. “When people know the building is in financial distress, it’s hard to get them to move in,” he says. When Erickson purchased the property, occupancy was in the low 60s. Butler expects the property to be 90 percent occupied within a year or so.
Erickson also recently announced a new ground-up project, Lantern Hill in New Providence, N.J., located about 20 miles west of New York City. The project is a new concept for Erickson, a small-scale CCRC with 300 independent apartments and 100 healthcare units.
The typical Erickson campus includes approximately 1,500 units. Lantern Hill will also offer more concierge-type services and will have a higher price point than the other two Erickson properties in the area. The starting entrance fee for a one-bedroom unit at Lantern Hill is $332,000. Residents also pay a monthly fee, though the rate has not been established yet.
“We feel good about this market,” says Butler. The area has a lot of age and income-qualified seniors. “We look for markets with home price stability,” adds Butler. The median home value in New Providence is $539,500, according to Zillow.com. Home values in New Providence have risen 12 percent during the past year.
Companywide, Erickson sold 1,800 units in 2013 and 5,000 units during the last three years. The occupancy rate across the portfolio stood at 96 percent at the end of 2013.
An improved housing market helps, says Butler, although some markets have rebounded more quickly than others. Another factor is the company’s ability to create the right product at the right price for the market. “We spend a lot of time in product research,” explains Butler.
New CCRCs
Housing market gains are prompting new development. Eighteen new CCRCs are expected to open by 2015, according to Chicago-based Ziegler, a specialty investment bank. Ten of those projects were announced in the last three months. “It’s a very good sign,” says Lisa McCracken, senior vice president at Ziegler.
Lutheran Life Communities broke ground in October on a new project in Naples, Fla. The Arlington of Naples is located on 39 acres in Lely Resort, a master-planned community with 7,000 residential units. The Arlington will initially include 132 apartment residences in a five-story building, plus 31 stand-alone villas.
The main building also includes 42 assisted living units, 37 memory support units and 44 skilled nursing suites. The average entrance fee is $650,000, and the project is expected to open in July 2015.
About 87 percent of the units are now reserved, and 70 percent of the depositors own homes in the immediate area. The others mostly reside in the Midwest.
The project hit its presales goal of 75 percent last May, closed on its bond financing of $190 million in January, and then began construction.
The housing market downturn negatively affected the velocity of sales that began in 2010 at the Arlington of Naples. “We could not have opened at a worse time,” says Marie Carlson, senior vice president of strategic development at Lutheran Life Communities, which owns and operates five communities and is based in Arlington Heights, Ill. “People were worried about selling their homes.”
The pace of sales at the Arlington picked up as the housing recovery gained steam. Local home prices in 2011 averaged about $449,000, according to a study commissioned by Lutheran Life. By June 2013, the area’s average home price hit $597,000. About 1,200 homes were sold in the Naples area in 2012, and nearly 1,000 through the first half of 2013.
“We are crazy busy,” says Carlson. “Everyone’s breathing a sigh of relief.”
Methodist Retirement Communities owns and operates three CCRCs in Texas. The state’s economy, along with home prices, remained fairly stable during the downturn. Sales at the Methodist properties never took a deep slide, but they have picked up lately, according to Ron Jennette, president and CEO of the Methodist Retirement Communities based in The Woodlands, Texas.
The group’s community in Lufkin, Texas, was hit particularly hard by the housing downturn since some industries moved out of the area. After 2008, there was a six-month period when no new homes were added. “Once we got through that phase, everything normalized,” says Jennette. Today, patio homes are built on the campus as the need arises.
In January, Methodist Retirement Communities broke ground on a new $40 million CCRC, the Crossings in League City, near Houston. It will include 116 independent living units, along with 36 assisted living and 24 memory care units. The property will also include 28 skilled nursing suites and 20 units for those undergoing short-term rehab.
About 80 percent of the independent living units were presold in less than a year. Entrance fees were priced to match local home values. The average entrance fee ranges from about $250,000 to $300,000. “The housing market has been remarkably stable,” says Jennette.
California upturn
Warren Spieker no longer senses panic from potential residents with homes to sell. “Clearly the housing market is better,” says Spieker, managing partner at Continuing Life LLC, based in Carlsbad, Calif. The company provides development, advisory and administrative services to health centers and four CCRCs in California.
The CCRCs are owned by separate limited liability companies, which include some of the partners of Continuing Life. The company is planning new communities in San Juan Capistrano in Orange County, and at Scripps Ranch in the San Diego area.
The underlying housing markets vary widely in California, says Spieker. San Diego took the biggest hit, while homes in the San Francisco area maintained their prices. But overall, the California housing market has recovered more quickly than Spieker expected.
In 2007, Continuing Life opened University Village in Thousand Oaks, Calif., and doubled the size of its La Costa Glen project in Carlsbad, Calif. “It was tough timing,” says Spieker. Looking back, he notes that sales in 2007 took twice as much work for half the results. “That’s no longer the case,” he adds.
In late 2013, Continuing Life opened Stone-ridge Creek in Pleasanton, which is located in the San Francisco Bay Area. Sales started in 2006. The CCRC includes 414 independent living units. The average entrance fee is about $700,000, comparable to median home values in the area.
Although some CCRC developers dropped prices during the recession, Continuing Life doesn’t cut prices. The company prefers to have its pricing lag local housing prices. Initial pricing is set below average local home values in order to encourage new residents to sign up. “That helped us in the downturn,” says Spieker. “We want to maintain affordability.”
The approach also helps preserve resident satisfaction, since the first wave of buyers can get angry if new residents pay less. Once communities are full, location pricing is introduced. Units in more desirable locations cost more at resale time. That approach also helps eliminate transfers among existing residents to the better-located units, notes Spieker.
Changes in the housing market have prompted new programs and policies at communities. Many companies began offering relocation services during the downturn, which they continue to provide.
Erickson Living adjusted its refund policy in 2013 in order to address concerns about the possibility of falling unit prices. Under its old model, residents or their estates received a 100 percent refund of the entrance fee if the unit resold for that price. If the unit was sold for less, then the resident or family got that amount. “When the market declined, it became a concern,” says Erickson’s Butler.
The new policy refunds 90 percent of what the resident pays, regardless of the unit’s resale price, explains Butler. “Seniors were asking for certainty.”