A Complicated Alliance Emerges

by Jeff Shaw

While some owners see opportunities in converting obsolete seniors housing into behavioral health facilities, others look for ways to improve those services within their communities.

By Jeff Shaw

Seniors housing and behavioral health real estate have a lot in common. Both house people with a largely needs-based offering. There are a wide range of products to serve a variety of needs, and residents are sometimes not there by choice.

Both sectors also have favorable demographics and strong real estate fundamentals on their side with demand outpacing supply.

Behavioral health real estate covers drug and alcohol recovery centers; high-acuity mental health centers and hospitals; intellectual developmental disability and intermediate care facilities; supportive/transitional housing; treatment centers for eating disorders; and a variety of outpatient service centers.

In recent years, seniors housing and behavioral health facilities have become deeply intertwined. Several of seniors housing’s biggest owners, including REITs, are increasing their holdings in behavioral health. Many even see an opportunity in converting functionally obsolete seniors housing communities into behavioral health facilities.

“There’s a deep need for more behavioral health facilities,” Taylor Pickett, CEO of healthcare REIT Omega Healthcare Investors said during an October interview with Seniors Housing Business. “Part of the reason that’s interesting from our perspective is that it’s one of the few reuses for our skilled nursing facilities. They’re tough to repurpose, but you can serve those with psychological and substance use disorders in those spaces pretty easily.”

On the flip side of that coin, there’s also a deep need for more behavioral health services within seniors housing communities.

“We know that there is a need for increased behavioral healthcare delivery,” says Ryan Brooks, senior principal with the National Investment Center for Seniors Housing & Care (NIC). “Last fall, NORC at the University of Chicago found that more than half of all seniors housing residents have at least one mental or behavioral health diagnosis, and approximately four in five nursing care residents have a behavioral health diagnosis.”

As both seniors housing and behavioral health grow to meet increasing demand, expect these two sectors to become even more interwoven.

Physical plants are similar

Rick Shamberg, managing director of Scarp Ridge Capital Partners, has a deep background in seniors housing, and previously owned a behavioral health property. He even chose to live down the street from that property for a summer to better understand the industry.

“I learned pretty quickly that there are a lot of synergies and similarities,” says Shamberg. “You’re providing housing and care. There’s a continuum of care similar to seniors housing, starting with detox all the way through outpatient mental health services. There’s a residential component as well.”

Adaptive reuse projects are never easy, but converting skilled nursing to behavioral health might be among the easiest choices.

“Owners that want to invest in behavioral health are highly interested in senior living properties, particularly [facilities] built between 1975 and 2010,” says Shamberg. “Seniors housing investors look at these properties as functionally obsolete, not attractive to today’s baby boomer — smaller units, lower ceilings, narrower hallways.”

Skilled nursing of that era was often designed for double-occupancy rooms, which are no longer what residents want. But two residents to a room still flies in a drug rehab setting, for example.

“The conversion costs to repurpose are low,” says Andrew Sfreddo, head of longtime seniors housing brokerage firm Blueprint Healthcare Real Estate Advisors’ new behavioral healthcare division. “You have a commercial kitchen, commercial laundry, inpatient baths, showers and sleeping quarters, and a nursing staffing station.”

But not everyone sees conversions as so easy. Healthcare REIT National Health Investors (NYSE: NHI) is immersed in both seniors housing and behavioral health, but it has never undertaken one of these conversions and doesn’t plan to, according to Kevin Pascoe, chief investment officer.

“We have found that zoning is a hurdle and, depending on the planned level of care, conversion can be very expensive. Our preference is to sell assets and recycle capital. Also, when evaluating behavioral health acquisitions, we typically are looking at purpose-built assets.”

Prevarian Cos., a developer in both the seniors housing and behavioral health spaces, greatly prefers new ground-up construction to redevelopment projects for a few different reasons, says Allan Brown Jr., partner with the company.

“It is a competitive business, and aesthetics and location matter. Our acute care system partners often expect a more tailored approach. Lastly, we’ve found that adaptive reuse is not as cost-effective as one might expect.”

Supply-demand landscape is favorable

Unfortunately, there is no central data set for behavioral health properties like NIC provides for the seniors housing industry. However, anecdotally, every source says that demand for behavioral health is extremely high and that supply lags far behind.

“Generally speaking, demand is growing faster than supply,” says Pascoe. “This has historically been a very undersupplied industry from a real estate perspective, and we have heard too many stories of care being provided in default settings including often overcrowded emergency rooms.”

Brown says that Prevarian usually works with joint venture partnerships with local hospitals, and “they tell us that the need is profound.”

Chris Barnet, executive vice president at commercial real estate agency Rubicon Representation, says most of his clients ended up hiring a third-party firm to crunch numbers on a specific market. He also notes that it can be difficult to get municipal approval for behavioral health properties due to a negative stigma associated with such properties.

“These municipalities say, ‘What a great idea! But don’t do it here. Don’t do it in our neighborhood. Do it somewhere else.’”

“Most behavioral health companies want to be close to a major airport, but they want to be out of the way from society,” continues Barnet. “They want to be accessible, but they don’t want to be visible. Confidentiality is huge for these guys. Separate entrance, separate exit — they don’t want to be seen coming and going. There’s a stigma attached to it.”

“A key challenge of really understanding the demand, however, is understanding what portion of this population has the propensity to seek treatment,” adds Brooks of NIC. “It isn’t just whether or not someone needs help, but whether he or she will go get treatment for it.”

Insurance plays a part

Still another reason many owners are interested in the behavioral health space is that the payor landscape is easier to deal with than in skilled nursing.

“A large part of the growing opportunity in behavioral health real estate is, frankly, driven by payment,” says Brooks. “Payors and insurance companies in particular have recognized the importance of mental health, and they are willing to pay for it.”

Blueprint’s Sfreddo says that Medicaid-based behavioral health models have high demand and low supply, and recent increases in reimbursement make it even more viable. Of the 49 states that responded to a Kaiser Family Foundation survey, all saw rate increases in reimbursement in 2022 and all but one saw increases in 2023.

“The behavioral health space started with the Betty Ford clinics of the world, high-end private pay,” says Sfreddo. “Now commercial insurance providers have been involved. They’re mandated to treat mental health the same way as physical health.

“On the Medicaid side, Medicaid enhancement has taken off in the majority of states. That has fueled more people being able to get care. The need is absolutely there. You can see that mental health, depending on acuity, has been underfunded.”

Mental health matters

But seniors housing operators that choose not to enter the behavioral health real estate space still need to consider how these services can play a role within their walls. 

“A shift is needed from simple awareness of the problem to the establishment of clearly defined protocols and services,” says Brooks. “The growth of telehealth is a step in the right direction, especially given the shortage of mental health specialists. 

“Training staff about the importance of mental health and what red flags to look for are important first steps to take. Staff should look for simple clues that indicate isolation or a change in behavior. Additionally, big life events such as the recent loss of a spouse followed by a move to a community often put a new resident at increased risk.”

Of course, every operator will ask the same question: “What will that cost?” Brooks adds that bringing in a third party at no cost to the operator is one viable option.

“Even without adding to an operator’s balance sheet, it is possible to have a psychiatrist or nurse practitioner see residents and bill their own professional fees to [private insurance companies] or Medicare.”

Rubicon’s Barnet takes it a step further. “Seniors housing operators need to joint venture with behavioral health operators and bring that service into the seniors housing market.”

As an example, senior living operator GenCare recently partnered with Rippl Care, a behavioral health company focused on caring for seniors with dementia.

“The partnership bridges the significant gap in behavioral health services available to seniors,” according to a GenCare press release announcing the partnership.

Prevarian partners with a telehealth company to bring mental health services to its residents.

“We are working with a telepsychiatry company now to implement its tailored services in our senior living communities and are introducing the company to other operators we know,” says Brown. 

“Residents and their families deal with challenges related to behavioral health issues and medication management, and the best place to receive care is at home in the community.”

Scarp Ridge’s Shamberg expects to see more partnerships like this moving forward.

“Just like a large-scale continuing care retirement community would have a chief medical officer, having a relationship or partnership with a therapist who’s available for our residents and families is a potential solution.”

“The vast majority of senior living has no stakeholders who really understand the issues,” adds Shamberg. “We need to get smarter and educate each other as this becomes more prevalent, and it will. It’s also good for our business. It closes the back door. It extends length of stay. It provides a more amiable community.”

Shamberg also notes that operators should be conscious of how their programming works with behavioral health issues. 

“Happy hours have become a big thing. But if you have an unhealthy reliance on alcohol and you’re invited to happy hour every day, it’s not great.”

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