LOS ANGELES — Investors of all types are clamoring to cash in on the Baby Boom generation, as this aging population readies to kick off a 20-year need for care and seniors services. That’s according to panelists at InterFace Conference Group’s Seniors Housing West conference, held March 3 at the Omni Los Angeles Hotel.
Those looking for a long-term investment are betting heavily on the Boomer population, which is 76.5 million strong, with the oldest being 69 and the youngest turning 50 this year.
“The first Boomers are only turning 70 this year,” said keynote speaker Lynne Katzmann, president and founder of Juniper Communities. “They have a decade to go before they need services, but they are today’s primary buyer.”
Much of this demographic will have a strong understanding of seniors housing options by the time they need the services themselves, Katzmann asserted, because they will have been down that road before with their aging parents. With this in mind, Katzmann believes it’s incumbent upon the current developers and operators to not just offer the best in senior care, but to invest in their facilities and in client (aging parents and their children) education as well.
“We must take action today if we’re going to make any money tomorrow,” she said. “We have to create value propositions that work today and tomorrow. We have to educate the consumer and actively promote that value proposition. That is the recipe for seniors housing future success.”
Diluted developers
One of the biggest challenges facing today’s seniors housing investors is the increased competition from inexperienced developers and operators.
CBRE’s Investor Survey and Market Outlook for Seniors Housing and Care noted about 69,000 units must be added each year from now until 2024 to accommodate for the 10,000 seniors turning 65 each day for the rest of the decade. The current rate of construction is just north of 39,000 units being delivered each year.
With an impending strong flow of seniors entering the market 15 to 20 years from now, at a stable rate, it’s no surprise the market has attracted the attention of a few outsiders.
“The biggest problem we faced after the financial crisis and rebound wasn’t competition from other seniors housing developers, it was from the multifamily guys,” said Bennett Johnson, vice president of valuation and advisory services for CBRE and moderator of the “State of the Industry and 2016 Outlook” panel. “You go up against the multifamily guys, and they’re so aggressive, they would close in 15 days. We see a lot of multifamily guys getting into assisted living. They say ‘how hard could it be?’”
This competition is further enhanced by the favorable lending environment that may greenlight seniors housing for developers with little to no experience in service- and care-based facilities.
“I’m more than concerned about pockets of development that have been funded by very irresponsible lending,” said fellow panelist Patricia Will, founder and CEO of Belmont Senior Living. “I think those projects are going to crash. When that happens — and that supply really comes on in late 2016 and 2017 — it’s going to tank the whole market because the headlines are going to read poorly.”
“Will it affect cap rates on really high-quality product? Probably not,” Will continued. “Will it affect capital formation overall? Yes. People are going to run for the door.”
Panelists across the board identified a few areas in danger of overbuilding and perhaps at risk of faltering due to less-than-scrupulous lending. Primary markets of concern include North Dallas, Houston and parts of Chicago.
The National Investment Center for Seniors Housing & Care (NIC) noted seniors construction activity marketwide was at an all-time high, representing 5.8 percent of the current supply. Even this number is concerning, CBRE’s survey asserted.
The number of assisted living and memory care units under construction at the end of 2012 was fewer than 23,000. Last year, nearly 49,000 units were under construction. When you factor in a development timeline of 12 to 15 months, that means about 80 percent of all units under construction will be delivered this year.
This may be a nationwide concern, but fears are clearly heightened in markets where seniors housing experts are already seeing too much, too soon.
“You see some markets that have tremendous imbalance,” Will said. “Some of these Texas markets and pockets in Chicago have construction starts between 10 percent and 15 percent of the current inventory. That’s scary. These submarkets may be overbuilt.”
Delivering on your promise
With higher costs of labor and the cost of construction up 18 percent to 19 percent over the past two years, according to panelists, it means a higher cost of capital, higher rents and a need to incorporate memory care into facilities. When these hurdles are combined with the increased competition both from within and outside the industry and the threat of overbuilding, seniors development can be a daunting task.
The experienced operators aren’t worried, however. They have value propositions to fall back on.
“The greater risk than oversupply is underperformance,” said Will. “Because many people don’t understand what it takes to responsibly run something like a memory care facility that enables seniors to live and thrive.”
Many operators are re-evaluating their value propositions and reinvesting in their communities in anticipation of the Boomer seniors housing wave. The strategy of staying put and deploying capital into assets where you’re already a market leader may be a good one, given the current risks, according to one panelist.
“One issue our industry faces is so little product differentiation,” said Dan Hutson, vice president of communications and marketing for the Be.Group and a “What’s Trending in Management, Marketing and Occupancy Levels” panelist. “We create these communities that are very good, but if people are saying ‘that’s not to my taste, that’s not what I’m looking for, I’m looking for a different kind of solution,’ then we as an industry have to stop offering very limited solutions.”
Justin Hutchens, executive vice president and CIO of seniors housing and care for HCP and a “State of the Industry” panelist, noted his REIT is taking this time to expand upon its current offerings in the hopes of remaining competitive in the near future.
“It’s fine to be a developer out there because there are a lot of opportunities,” he said. “You have to be cautious that you’re not entering the market as a price leader or entering a market with multiple new entries. Some markets are completely falling into those two arenas.”
“We’re more interested in repositioning our product in the next few years,” Hutchens continued. “We’re redeploying capital back into our assets to make them mid- to high-price-point product to reach a broader audience.”
HCP has about $10 million in capital invested in Brookdale properties. The REIT has invested about $5,000 per unit over the past two years to reposition these assets, Hutchens noted.
Brookdale is the largest operator in the United States, servicing about 108,000 residents in 1,123 communities throughout 47 states. No matter how easy it is for multifamily developers to get financing, it’s tough to beat numbers like this when it comes to the backbone of seniors housing: quality of care.
Just as a REIT must appreciate its operators, so too must that operator appreciate its development and investment arms.
“There are a lot of people getting into this industry for the wrong reasons,” said Patrick Dooley, president of Milestone Retirement and an “Outlook for Seniors Housing Development” panelist. “There are people we turn down because they don’t have the residents’ needs in mind. We do business with people who want to take care of seniors. When you do that, you will actually make money.”
— Nellie Day