Affordability Is Urgent Matter

With today’s seniors housing prices too high for tomorrow’s residents, the industry is searching for answers to ease the burden.

By Lynn Peisner

The seniors housing industry is under pressure to solve the problem of a lack of options for America’s aging middle class. But no one has developed a proven model just yet.

“This is an important topic, and one that we’re going to be challenged with for at least the next couple of decades,” says Dana Wollschlager, principal and senior living practice leader at consulting firm Plante Moran Living Forward. “There is no silver bullet.”

Wollschlager’s comments came during a recent panel session addressing the affordability issue at InterFace Seniors Housing Southeast in Atlanta.

Even retirees with a modest amount of savings are concerned about their ability to afford seniors housing, according to Wollschlager, who can speak with authority on the anxiety seniors feel. Her 71-year-old mother, a widow, is on a fixed income.

“She is that Baby Boomer who has too much money to qualify for an affordable low-income housing tax credit (LIHTC) community at 60 percent of area median income, but who doesn’t have enough to put $500,000 down to move into a CCRC (continuing care retirement community),” explained Wollschlager.

Wollschlager’s mother paints a picture of how tomorrow’s demand will look. Today, seniors will pay an average of $3,025 per month for independent living and $4,454 for assisted living, according to Plante Moran. Many Baby Boomers won’t be able to afford seniors housing unless costs go down. 

According to BlackRock, a New York-based global investment firm, the average Baby Boomer is planning on a yearly retirement income of $45,000. 

Middle-income can be defined as an annual income of $36,000 to $60,000, with home equity between $150,000 and $400,000 and an average of $250,000 in savings. 

“We are working backward,” says Mark Landreville, executive vice president of Bloomington, Minn.-based HJ Sims. “We’re looking at how much money a person has in retirement, in their homes and with Social Security to find out what we can show for monthly income. So if people can expect to spend 50 percent of their monthly income on housing, what is that number? What is the shortfall between that number and what’s available today, and how will we make that up the difference?”

“The need for moderately priced living solutions is just starting to get attention,” he adds. “I don’t think people have given it a lot of thought. It’s a conversation we’re just starting to have.”

How do we fix it?

Stakeholders in the industry are talking about several potential changes to the way seniors housing is currently developed and operated. These changes could result in a housing product that is more affordable in the future.

The ideal model would require new standards and practices that would enable for-profit companies to deliver easily replicated prototypes of moderately priced housing in multiple markets, which many say hasn’t happened in the volumes necessary to meet tomorrow’s demand.

Of course, this model would have to provide attractive returns to investors and also meet the lifestyle preferences for Boomers, who differ from the Silent Generation (currently ages 72 to 92) and Greatest Generation (people born between 1901 and 1924).

This is no small task, and it’s a problem with many moving parts. Some of the key solutions getting attention at conferences and in news stories these days revolve around a few objectives: 

  • Discovering ways to reduce overall square footage — Many experts are evaluating a prototype of smaller, yet still private, units alongside downsized common areas that are flexible and can easily transition from uses such as a dining area to an activity space.
  • Exploring third-party vendor solutions — Some operators are already examining potential cost savings gained from eliminating a commercial kitchen and opting for a third-party catering service, or exploring telehealth options that enable computers or mobile devices to access health care services, which could decrease staff costs. 
  • Building relationships between developers and operators to enable optimal site selection — Many operators are the first to admit they’re not necessarily developers by trade. Partnering will become more important to navigate rising land prices and construction costs and to identify locations ideal for Boomer-based seniors housing. Additionally, collaboration will be necessary to shorten construction schedules.  
  • Adapting different financing models — Making the numbers work would likely require less debt for less time, so investors would need to bring more equity to the table or be more efficient with the development process. 

Landreville presented two scenarios at LeadingAge: bank financing could be less than 3 percent interest for 10 years, which would require 25 to 30 percent equity, or financing through bonds that have not been rated by a rating agency at 5 percent to 6 percent interest for 35 years with 5 to 10 percent equity down. 

Landreville says non-rated bonds, which would not be assigned an investment grade, are attractive because they permit higher leverage in financing and improve equity returns. He adds most financing models would depend on whether tax reform eliminates private activity bonds.

  • Defining a housing product that is a hybrid of independent living and assisted living — Some experts say assisted living itself is a barrier to providing affordable options for the middle-income demographic because compliance with mandatory building and operating regulations is costly. Consequently, several providers are experimenting with an independent living model that incorporates health services in creative ways.

Demographics overwhelm

Each of these topics is part of a changing dialogue about senior care and living. The unprecedented groundswell of demand expected from aging Baby Boomers is leading the urgent need for this change.

By the time all Baby Boomers turn 65 in 2030, 18 percent of the U.S. population will be at least 65 years old or older, according to Pew Research.

“We have never seen this kind of population anomaly before,” says Landreville. 

Seniors are coming in sheer numbers, and they will not be as prepared financially as their parents were. 

Several studies have concluded that the Great Recession didn’t hit other cohorts as hard as it did the Baby Boomers, who don’t have as many remaining working years to make up losses.

Additionally, the Economic Policy Institute reports that increasingly, individual savings have been replacing pensions alongside a decreasing amount of Social Security benefits. With all these catalysts, those familiar with the historical arc of seniors housing say change is imminent.

Chuck Hastings, vice president of finance and business development for Bloomfield, N.J.-based Juniper Communities, cites the increasingly common practice of developing affordable independent living buildings that rely on outside services for care. These types of properties could perhaps be viewed as a bellwether of a changing industry.

“Some are saying, ‘Hey, isn’t that assisted living without the regulations?’ It’s the same tension that our industry has had for four decades.”

Hastings explains the evolution of this tension: Dramatic cuts to hospital Medicare reimbursements in the 1980s spawned the growth of skilled nursing. Stressed by losing patients, hospitals argued that skilled nursing was inferior and patients weren’t getting proper care in skilled nursing.

The cycle continued in the 1990s, when skilled nursing became an institutional model that many argued was overregulated. This led to the growth of assisted living, which then prompted the skilled nursing segment to assert that assisted living wasn’t the appropriate care environment.

“The same thing is happening all over again,” says Hastings. “This third phase of overregulation is combined with a distraught consumer sentiment about assisted living. This is the normal dynamic and tension in our industry. It will eventually sort itself out, but it’s going to be very interesting to see what the regulators do.”

State regulations, including building codes and mandates that require packages of services, play a large role in the pricing for consumers. 

“The providers and operators are having a good dialogue right now, but if we really want to elevate this conversation, we have to ratchet it up about five levels higher so we can have this conversation on a national level,” says Wollschlager. “We need to inform the individuals who have the power to impact cost in the regulatory environment.” 

Wollschlager strongly encourages states to examine more consumer-driven options versus regulatory-driven requirements.

“Most of the states essentially took skilled nursing regulations, made a few modifications, then slapped the words ‘assisted living’ on them. Services provided to a resident need to be on an individual-by-individual basis based on a specific care plan. Otherwise, people are going to be paying for services they don’t need.” 

Rick Banas, vice president of development and positioning for Bradley, Ill.-based Gardant Management Solutions, concurs that the responsibility falls on the seniors housing industry to be more vocal about assisted living.

“The industry will need to show Medicare, managed care and ACOs how it’s a better, more cost-effective option for someone to live in assisted living rather than  live in a nursing home or on their own. We do a lot of that here in Illinois to remind key legislators of the benefit.”