Question of the Month: Developer Pitfalls

Even with the wealth of data available on supply and demand, what pitfalls can developers fall into?

 It takes two to tango

By Dave Fasano

Director, HFF

In our team’s experience we believe that it is the “herd mentality” that is the greatest pitfall. 

Developers in their own right cannot overbuild. They need the buy-in of an operating partner, as well as debt and equity contributors. Understanding the needs of the community at a micro level is paramount to ensuring the long-term success of the project. 

Be diligent in understanding barriers to entry and current/future competition of your markets.

 

There’s a wealth of data; use it all

By Mark Lamb

Director of Investments, CareTrust REIT

Although the velocity of skilled nursing development opportunities has tailed off over the past 12 months, we continue to see projects where pro forma and construction budget economics are driving project feasibility for developers.

In some cases, inferior sites are selected based more heavily on price per square foot for the dirt with little attention paid to key data such as occupancy, hospital discharge info (i.e. discharges by diagnosis), number of Medicare beneficiaries in the primary market, reimbursement rates and the environment surrounding bundled payment initiatives, if any.

 

The market is changing

By George Wilson

Managing Principal, Meyer Architects

Developers can fall into the habit of doing the things they have always done for senior living projects. Times are changing. Our seniors are more educated and savvy, and expect new and better stuff.

For example, my father is 85 and owns an iPhone and laptop. He does all his banking online. He will look for strong Wi-Fi signals wherever he lives. He and his wife enjoy going out three times a week to different dining venues. He also enjoys his fitness regimen and his pool.

Our clients need to think about these items during design:

• Various dining options to keep our seniors engaged.

• Fitness areas, walking paths and a pool for daily activity.

• Big-screen TV areas to watch the Philadelphia Eagles on Sunday with space to invite friends and family, and maybe even have a beer.

• Meeting areas that can serve different functions like hosting a card club, art activities and resident committees.

 

Market research is paramount

By Peter Greenberg

Senior Land Acquisition Manager, Brandywine Senior Living

Prior to buying land, we develop a thorough understanding of where new seniors communities could be built in the market areas of interest. We meet with town planners, engineers and administrators in the clusters of towns that form our market area to become informed about where competition is likely to occur and when. 

As zoning decisions change over time, it is important to understand how these changes may invite new competition. The scarcer land is, the easier it is to predict the supply outcome. We firmly believe that fully understanding the supply side is hugely important before making the commitment to build.

We also take a realistic approach in calculating our customer base by thinking of the 80-plus cohort  as our customers as opposed to thinking about the 75-plus cohort.

 

Watch for warning signs, and heed them

By Paul Mullin

Senior Vice President of Development, Silverado Senior Living

I try to follow the advice that a number of business gurus have recommended: pay close attention to warning signs and your gut feeling about the business cycle.

After reviewing the most recent NIC quarterly data showing one of the highest spreads in a long time between absorption and new development inventory, my gut is telling me to keep some powder dry.

 

Don’t take data at face value

By Joe McElwee

Principal – Development, Capitol Seniors Housing

The pitfall that developers can fall into is accepting the supply and demand data unconditionally. 

I am not a big fan of empirical supply and demand data. There are so many other factors that should influence the decision to develop in a particular market. 

I would rather develop in a market with 10 100-unit communities that are 15 years old than develop in a market in which there are two 100-unit communities that are two years old.

The more important factors are: strength of your brand, cluster of your brand (the benefits of local training and support programs), quality of the site versus competitor sites, accessibility of the site within the market area and accessibility of the site outside the primary market area.

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