Real estate investor carves out a niche in the active adult sector.
By Jeff Shaw
Michael Hartman believes in active adult housing. The demographics are just too good. The demand is so much greater than the supply. It’s just a matter of giving the people what they want, he says.
“I’m known in my company as the guy who will die on that hill.”
In 2003, Hartman co-founded seniors housing investment firm Capitol Seniors Housing (CSH), which has built or acquired 116 private-pay seniors housing communities in the 20 years since.
After a few years away working in the active adult sector, though, he returned in 2017 to lead a new branch of CSH focused on age-restricted apartments. In the years since his return, CSH has built up a portfolio of seven active adult communities in four states housing 1,300 residents.
Seniors Housing Business spoke with Hartman about the past, present and future of the active adult subsegment of seniors housing.
Seniors Housing Business: Walk us through your career leading up to your current position with CSH.
Michael Hartman: I’ve always been a commercial real estate guy. I went to business school, graduating from Wharton [The Wharton School of the University of Pennsylvania] in 1995 with an MBA in real estate.
I was a real estate investment banker coming out of business school. The 1990s was a big boom period for REITs. From 1995 to 2001, I was in investment banking with Deutsche Bank, raising capital for real estate companies across all different sectors.
In the summer of 2001, I was involved in a deal in which Sunrise Senior Living was seeking to buy Marriott Senior Living. It was the biggest deal in the industry at that time, with the second-largest operator buying the largest operator. I was advising Sunrise. Then the Sept. 11 terrorist attacks occurred, and the deal fell apart.
After that, the CEO of Sunrise asked me to come work the deal from inside. That was 2002. When I went to Sunrise, I met Scott [Stewart], future managing partner of Capitol Seniors Housing. In 2003, we left Sunrise together and went to form Carlyle Seniors Housing, which became Capitol Seniors Housing. That was 20 years ago, and we’ve built or acquired 116 communities across assisted living, memory care and 55-plus housing since then.
SHB: You have a deeper background in active adult than most. How did you end up focusing on that subsector?
Hartman: During the Global Financial Crisis (2007-2008), I ended up leaving CSH for a few years. During those years, I helped multifamily companies raise capital. I sort of did what I did before as an investment banker.
In 2013, I was helping Cortland Partners (an Atlanta-based multifamily owner) raise some multifamily capital — not 55-plus, not seniors housing — I visited a competitor in Houston called Camden Royal Oaks. Camden is a public multifamily company, but it had this one 55-plus property.
This property was getting a huge premium to it’s conventional multifamily competitors and it was the first time I had seen that. The operator didn’t do a whole lot more than restrict the age.
A lightbulb went off in my head. Seniors want a property that’s designed and built to their needs. They’re willing to pay a premium for it. Coming from a career in assisted living, my thought was that there are a lot more folks who can afford $1,500 a month for 55-plus versus $5,000 for assisted living.
I ended up leaving and joining Cortland in 2014. I spearheaded a team that designed and created the Attiva brand, focusing on acquiring and renovating existing 55-plus communities, which I did for Cortland for three years.
In 2017, I returned to Capitol Seniors Housing to start the 55-plus program.
One other point on that: I view the true patient zero — the first modern active adult community — as Overture Plano. It was really the first purpose-built community which was well thought out, specifically designed and branded as a modern, recent-vintage, 55-plus rental community. That’s a Greystar and Carlyle community that opened in 2016. So the modern era of 55+ development is less than 10 years old.
A difficult time to build, buy
SHB: How big is CSH’s active adult portfolio currently, and what’s your growth target?
Hartman: Right now, we have seven communities and 1,300 residents in four states, largely the Southeast and Texas. That’s our focus.
The goal, in a good market environment, is to acquire or develop four or five properties a year. But the capital markets are in turmoil, so it’s been very difficult. It’s a capital markets problem, not an industry problem.
The issue on the development side is access to both equity and debt. On the acquisitions side, we’d love to be acquiring, but not much comes up for sale. It’s tough to grow when there’s not a lot out there. We’re focusing on asset management of existing properties right now.
When there was availability of capital, we did four acquisitions in 12 months. When the market’s right, we’d love to do four acquisitions and four new developments in a year.
SHB: Do you have a preference on growing via acquisitions versus development?
Hartman: In an active market where there’s debt and equity available, our approach would be right down the middle, 50/50. There are pros and cons to both. Development is riskier — there’s entitlement risk, development risk, lease-up risk, exit risk. It’s higher risk but higher reward.
We’re really a merchant builder, meaning we typically use opportunistic private equity capital with a three- to five-year ownership horizon. Usually that means the idea is to buy it, fix it, fill it, sell it. Or, if we’re going to build it, find the site, build it, fill it, then sell it. We try to cycle through and we’ve been successful in doing that — we’ve done it 116 times.
We currently own 26 communities. That means we’ve fully cycled through 90 of them. That’s the goal and that’s our investors’ goal.
I would emphasize that acquisitions in a market like this would be ideal, but there’s just not a lot out there for sale.
If you build it, they will come
SHB: Active adult owners and operators frequently express frustration that the consumer isn’t aware of, and doesn’t understand, this housing type. How do we get over that hump and become a recognized lifestyle or asset class?
Hartman: It is a much smaller segment than other types of seniors housing. The penetration rate for independent living, assisted living and memory care is 11 percent. The penetration rate for 55-plus housing is under 1 percent.
When the first modern assisted living product was built in 1986, the penetration rate was zero percent. Now we’re 40 years later and we’re at an 11 percent penetration rate. There’s a strong argument to be made that active adult could achieve a penetration rate equal to that. In fact, with the higher level of affordability than seniors housing, the penetration rate could be higher.
The most penetrated active adult market in America is Buffalo, New York. That’s because there are two companies based there, so take that out and next is Dallas. It’s an active market with lots of supply, well occupied. The penetration rate in Dallas is 1.2 percent.
That is a long way of saying I believe that there’s an economic principle called Say’s Law, which states that supply creates its own demand. Many markets in America simply don’t have any active adult product. Therefore, the customer doesn’t understand it.
How do we get the consumer to better understand this housing type? It’s very difficult if there’s not existing 55-plus rentals for people to visit and tour in a city. By simply supplying each of these markets, that awareness will become more and more powerful as new supply comes in.
Meanwhile, for-sale retirement communities have been around forever. Del Webb has been around for 100 years. That’s all over America. But the rental version has really only been around 10 years.
Does the consumer want to rent or buy? There’s a very recent Bank of America report about homeownership versus rental. The opening statement is that Americans overwhelmingly prefer to own a home. As they build their families, there’s a negative stigma toward renting.
That’s true across all segments — except baby boomers. Eighty percent of baby boomers prefer renting over owning. That’s up from 63 percent just last year. We’re now at a point where seniors are adapting their preferences toward rentals.
Also, seniors are increasingly comfortable with 55-plus communities over private-pay seniors housing because of this beautiful device right here in our pockets. With a smartphone, I can get food, help, transportation, even care with the push of a button. You can stay in 55-plus community and order those things up a la carte.
Find the right partners, sites
SHB: What’s your strategy for selecting operators in your active adult communities?
Hartman: Currently, we use Greystar almost exclusively. Greystar is the 800-pound gorilla in the active adult industry. They sort of control everything.
[Greystar ranked as the seventh largest U.S. seniors housing operator with 101 properties totaling 17,478 units as of June 1, 2023, according to the American Seniors Housing Association. However, that list accounts for all types of seniors housing, and Greystar exclusively operates active adult communities.]
We use Greystar because they’re in every market, they’re very responsive and have great personnel and training.
SHB: Give us some insight into your site selection process. What makes a property a good target for CSH?
Hartman: It begins with a great macro market strategy. What we’ve chosen for 55-plus is major metros in the Southeast and Texas. At CSH we created an acronym — A.C.O.R.N. — for Atlanta, Charlotte, Orlando, Raleigh and Nashville.
The major metros in this entire part of the country are those five markets. We’re looking for major sports teams, 24-hour cities.
We also love Texas. We have four communities there. We’re highly focused on Houston, Dallas and Austin.
Then, inside of each of those markets, you want to pick an area where you have great demographics. Our capital partners have helped us to develop what we call a demand model. We look at population density, affluence, growth and existing supply. If there’s an area, typically in the suburbs, that has all those great demographics and a good piece of land, we’re going to go after it.
There are two perfect sites to me. They’re different, but both great.
Great site No. 1 is what I would call a
walkable-to-retail site, usually inside of a mixed-use development where there are work-live-play elements. We have one in Buford, Georgia, named Outlook Gwinnett.
If you went to the Mall of Georgia, you’d see our community at the top of a hill by Top Golf, Andretti, Rooms to Go, 50 restaurants and pickleball courts. We’re right there. We’re inside the thick of it. You could walk to everything. It’s a senior’s paradise.
Great site No. 2 is one that’s in a more suburban, residential setting. It’s probably not walkable to retail, but it’s quiet, has great views and is closer to nature.
Some like to be in the hubbub, some like to be out of the hubbub. They’re both great strategies.
SHB: How has your finance background informed your strategies in the commercial real estate/active adult sector?
Hartman: I was an economics undergrad major then got a real estate finance degree. I use both of them.
You want to build the supply-demand equation: Limited supply, growing demand, good market. Fortunately, seniors housing has that advantage, and 55-plus has even moreso because it’s such limited supply.
I’ve pigeonholed myself a little bit. I’m in a niche inside a niche inside a niche — I am like one of those toy Russian nesting dolls. Real estate as an asset class is a niche. Inside real estate, seniors housing is a niche. Inside of seniors housing, 55-plus is a niche. But it’s a great niche.
Where we are right now in the cycle, getting deals to pencil out is very difficult. Costs are too high and returns aren’t high enough to attract investment.
When I use my real estate background, I have lots of transactional experience. When you’re underwriting a new deal, I draw upon all my experience to convince investors and lenders that what we’re trying to acquire is attractive.
When I say that I’m known in my company as the guy who will die on that hill, what I mean is that if it’s a deal I think we should do, I’m going to fight for it. We’ll need some luck with the Fed lowering rates, but we’re going to build that pipeline back up soon. I use all my background and experience for those battles.
SHB: What’s something people in the industry would be surprised to learn about you?
Hartman: I’m a big Grateful Dead fan. [The American rock band was formed in 1965.] How is that relevant? The first thing I’ve learned is that you need to reinvent and adapt in business.
Seniors housing is going through a widescale reinvention of itself because of technology and changing consumer preferences. With smartphones and a gig economy, the residents can simply order a car or food whenever they like, not to mention basic housekeeping or even home care. Why bundle those things into a monthly fee, when a la carte services and pricing is available and easy to access?
The existing stock of seniors housing in America was built for the Greatest Generation. You have a stock of housing for people who are dying at a rate of 10,000 a day. The baby boomers are completely different.
The Grateful Dead have been around for nearly 60 years. They have a residency in Las Vegas right now. They’ve never been more popular than they are right now because they’ve adapted.
The Grateful Dead have always asked people to be open-minded and not to judge a book by the cover. Political rivals Tucker Carlson and Nancy Pelosi are both avid Deadheads — which I think says a lot about the brand and the message.
There is a way to create something noteworthy that has broad appeal, that appeals to a contemporary audience but somehow is also a throwback to yesteryear.
When you’re serving an eclectic population of seniors turning 65, 70 or 75 ,you’ve got to put your differences aside. There are pathways to appeal to everyone without picking sides. I’m proud to be a Deadhead. I believe in the philosophy, and I think it applies to seniors.