Broker Q&A: Labor, Acuity Remain Most Pressing Issues

by Jeff Shaw

Investment sales professionals from across the country share their insights about where the industry has been and where it’s going.

Roundtable participants

Tim Dulany, Damien Carriero, Ken Carriero, Colliers International

Ben Firestone, Senior Managing Director & Co-Founder, Blueprint Healthcare Real Estate Advisors 

Richard B. Swartz, Vice Chairman, National Senior Housing
Capital Markets Group, 
Cushman & Wakefield

Adam Heavenrich, Managing Director, Heavenrich & Co.

Jim and Cindy Hazzard, JCH Senior Housing Brokerage

Charles Bissell, Managing Director, JLL Capital Markets

Austin Sacco, First Vice President, Co-Production Lead, National Senior Housing, CBRE Capital Markets

Bradley J. Clousing, Managing Director, Senior Living Investment Brokerage


By Jeff Shaw

Brokers have a unique place in the commercial real estate industry. Although they don’t buy or sell buildings themselves, brokers perhaps have to have their finger on the pulse of the industry even moreso in order to serve clients.

In a niche industry like seniors housing, where a wide variety of complicating factors come into play such as operations and healthcare, it becomes even more crucial that the real estate sales professionals understand the industry.

Seniors Housing Business spoke with a variety of specialty brokers regarding what makes this industry tick and where it’s heading.

Seniors Housing Business: What’s the most compelling trend or issue in seniors housing so far this year? Has anything surprised you?

Heavenrich: Acquisition pricing of core investment properties continues to get more expensive. But those private equity funds that are buying in this market have confidence that investing at these higher levels will offer a stable return in recessionary times as well as upside opportunity, because of the relatively inelastic demand to price. Equity is plentiful in this sector and we may see continued declines in equity return expectations. 

At the same time, we are seeing some great bargain opportunities for distressed properties. This is a great time for operators and their investors who have established a geographic or service niche to pick up some bargain acquisitions

Swartz: Across the country, the largest operational and financial challenge consistently comes back to staffing. The significant supply growth over the past five years with new properties opening every month combined with extremely low unemployment levels has created a severe shortage of experienced, quality candidates. This is particularly true at the department head level (executive directors and sales directors) but also filters down to line staff. 

Colliers: Labor expenses are surging with increased workforce challenges. New competition continues to pressure certain markets, construction costs are up, and aging baby boomers are making every effort to stay in their homes and postpone moving into a seniors housing community.

Hazzard: It seems like everyone is talking about the future of the middle market while still operating at a profit. Meanwhile, skilled nursing operators are still trying to gear up for the Patient Driven Payment Model (PDPM) rates that will take effect in October, causing buyers to be more cautious with their acquisitions. 

Bissell: The issue that keeps coming up in transactions we are working on and in conversations with equity sources is the search for quality operators. Many capital sources are seeking operating partners, and a common theme we hear in the market is that many of the quality operators already are tied up with one or more equity sources.

Sacco: I’d argue that one of the most compelling trends in our space today has to be the re-emergence of the public REITs in the acquisitions market. After dominating the acquisition marketplace from 2011-2015, the REITs have been primarily net sellers since that time. The market is dominated by private equity today. It will be very interesting to see the dynamic play out once the REITs ramp up acquisition activity.

Clousing: Based on the transactions we have been part of this year and owners we have been working with, 2019 seems to be the year of staff and resident turnover. Acuity has continued to increase in seniors housing creating more resident turnover, especially for memory care assets. On the labor side, the continued record low unemployment and new construction in our sector, and in healthcare overall, has created even more wage pressure and in some cases significant staff turnover.

Firestone: On the seniors housing side, it’s been surprising to see that development continues in light of the short-term oversupply. While demand and absorption are catching up and moving toward equilibrium, the rate of development remains ahead.

SHB: Acquisition volume has evened out to about the 10-year average. Do you expect that pace to continue, or should the industry be prepared for major changes?

Sacco: There are some who believed we were in the ninth inning of this cycle two years ago. The fact is that we have not seen any decreased level of activity in the marketplace, at least from our perspective, even though supply and labor issues have created headwinds in our sector. I don’t see any indications to expect a drop-off in acquisition activity or anything that would signal a major change within the industry.

Clousing: If capital continues to remain affordable, we do not slip into a recession, and supply remains in check, we anticipate activity will continue to remain high. Any significant shock to the economy or financial markets would significantly reduce volume. The most recent decrease in the 10-Year Treasury has revived two or three transactions in our pipeline that were starting to not price.

Swartz: We would anticipate acquisition volumes to continue at a fairly consistent pace, potentially with a further uptick in volume unless there is a significant shock to the system that has a negative impact on values. An influx of foreign buyer activity, particularly Asian, could also result in greater activity.

Colliers: This acquisition pace will remain consistent, at least for the next two to three years.

Hazzard: We believe that the market will continue to be relatively active. New buyers are still actively entering the space. And as new developments open, some of these “Cadillac” facilities that have too much debt on them will fail.

Bissell: We anticipate deal flow to continue at a steady pace over the coming few years. The REITs and large operators will continue to pare their portfolios, and institutional and private equity funds will seek to monetize assets where they can realize targeted returns for their investors.

Firestone: Blueprint’s data is actually inconsistent with that. We saw more activity than ever before in 2018 and are on pace to see an unprecedented amount of activity in 2019.

SHB: Which segments of seniors housing are you most bullish and bearish on right now and why? Has your opinion changed at all in recent years?

Colliers: I thought as people got older there would be a need for more assisted living and memory care. However, the senior citizen is realizing the benefits of an adult active living community and independent living facility.

Hazzard: The hot topic in the industry today is the “middle market.” More and more operators are trying to come up with ways to reduce overhead costs to make their facilities affordable to this vast market. We’ve been concerned for several years that this cycle of development is targeting the upper echelon residents at the expense of ignoring those in the middle market, which is the biggest segment of the population.

Bissell: We are bullish on the “active adult” senior apartment space now, especially assets focused to attract middle-income seniors. These projects can provide an attractive option for seniors who are not yet in need of care, and do not have the financial resources to afford a full-service independent living community. 

I would not say we are bearish on any particular segment. Some, like skilled nursing and freestanding memory care, are not generally in favor in the market right now, but can still offer investors strong returns. 

Firestone: I think you have to look at this question from the perspective of the two factions. On the skilled nursing side, the marketing is presenting a plethora of upside potential. Net operating incomes have compressed and values have adjusted accordingly. On the seniors housing side, we were fully priced a few years ago and that’s led to some distress.

SHB: Compare and contrast the last 12 months of the seniors housing industry to the previous few years. What stands out?

Clousing: We all knew this labor shortage was coming, but now it has really become a reality. Operators have been focusing on culture, pay rates, benefits and identity to slow help slow the turnover rate.

Hazzard: We believe that current buyers new to the market are a bit savvier and more disciplined than was the case the last few years. Experienced operators continue to focus on the current operations when valuing a potential acquisition. During the last few years many newer buyers were not only willing, but eager to bet on their ability to improve performance. As such, frequently paid higher prices for facilities. In our conversations with new buyers, it is apparent that they are doing at least some of their homework prior to purchasing facilities.

Bissell: In the current market, there is a broader array of active market participants than over before. Historically, one type of seller or buyer often dominated the market for a period of time. But the cast of active buyers and sellers in the market today is diverse, including merchant developers, operators, institutional investors, REITs and cross-border investors.

Sacco: The biggest shift we’ve seen has been a drop-off in new construction. The construction lending community has become much more astute as it relates to understanding critical components of a seniors housing transaction such as the importance of the operator and potential new competition. This has been a great thing for our space as it choked off the low-barrier, unmerited deals that were previously being done by folks without any type of seniors housing background.

Swartz: The major changes we see are a slowdown in lease-ups of many new projects as a result of significant new supply, significant interest in developing new urban product, and expanded awareness and interest in active adult.


SHB: Despite a slowdown in new construction and continued strong absorption, occupancy remains near a record low. How can owners and operators best break out of this cycle?

Firestone: Frankly, the short term will be choppy. But demographics remain very favorable in the long run as baby boomers approach the proper segment. If investors can structure ventures with patient and flexible capital, they’ll be able to reap the benefits in the long term.

Swartz: The industry needs to increase penetration rates to expand the resident pool through more effective marketing and PR.

Clousing: We are hearing that traffic is strong and move-ins are also strong. The challenge has been managing and addressing the high acuity of the resident moving in. I believe capturing residents earlier, while building a culture and programming, supported by highly trained staff, will boost resident satisfaction and increase the length of stay.

Colliers: By making it more attractive to a senior to move into the facility rather than stay in their home. AARP found that 76 percent of Americans 50 years of age and older prefer to remain in his or her current home. However, just 59 percent of older Americans think they’ll be able to stay in their community, either in their current home or in a different home still within their area. There will be an opportunity for owner-operators to bring more accessibility of those seniors who are struggling to stay in their homes.

Hazzard: We believe there are several causes for low occupancy. First, the average age of a senior entering a facility has increased. Second, in years past there was a big difference in price between home care and placing a family member in a facility. That’s not the case any longer. 

Third, with the wide variety of passive marketing available on the Internet, we often see many owners and marketing people becoming complacent in their efforts. They have simply become “tour guides” with only minimal community outreach, relying on groups such as A Place for Mom to bring their clients to them. 

Lastly, it really comes down to finding ways to provide care for the middle market. As more and more operators find ways of cutting operational costs without compromising resident care, in our opinion occupancy will stabilize.

Bissell: Operators and owners should seek to “manage through” the current environment by focusing on providing best-in-class care and service to their residents. In most markets, occupancy levels should recover over the coming few years. Owners and operators should also focus on providing transparency to industry data sources such as NIC MAP. The more accurate the industry data is, the more likely it is that developers and lenders will make informed and logical decisions relating to future projects.

Sacco: Maintaining disciplined investment criteria and rigorous site/market selection is critical when determining whether to move forward on a new project or not. It is also critical to ensure owners are appropriately aligned with an operator who truly understands the market and ideally has a successful track record operating in that particular market area.

SHB: Much has been written about the impact of technology on owners and operators. How is technology changing your job as a broker?

Swartz: Enhanced demographic and housing data tools have enabled us to provide buyers a better understanding of a property’s primary market area. Drone technology has enhanced the ability to fly low-level aerials, which can be very helpful to investors to get a sense of the design and quality of the property.

Hazzard: Data is more easily assessable, which allows operators to have real-time control over expenses that once took weeks to gather. Operators having the ability to review and adjust operations frequently, which has a direct, positive effect on NOI. As a broker, the financials that we must review are more coherent and accurate, which allows us to value the asset more efficiently.

Bissell: JLL’s Capforce database provides historical and real-time information on asset, debt and equity pricing procured by the more than 3,700 capital markets professionals in our company. This system tracks over $1 trillion of transaction volume, and tracks relationships with more than 63,000 clients and capital sources.

Sacco: A lot of this conversation was prompted in anticipation of the Boomer Generation, given they’re much more technologically savvy when compared to the Silent Generation. As owners and operators continue to look for a “leg up” against competition, I’d expect to see continuously evolving technology across the sector. 

One thing to be mindful of is how much technology is too much? In other words, confusing interfaces and heavy reliance on technology may lead to a perceived disconnect between the operator and the resident. Finding the right balance will be critical as technology continues to evolve in seniors housing properties that serve the Silent Generation today, and the Boomer Generation tomorrow. 

Clousing: Technology has continued to compress the timing of a transaction, and provide additional efficiencies through marketing, due diligence, contract negotiations and inspections. There can be almost unlimited exposure now from online marketing. 

However, we wrestle as a firm as to the balance of exposure and confidentiality. Seniors housing assets are closely held businesses that rely on staff and resident retention to preserve value. As brokers, we must balance creating an efficient market with preserving confidentiality and in order to retain value through the life cycle of an assignment.

Firestone: We’ve transitioned from technology being a “nice-to-have” to a “need-to-have” asset. As a firm, we’ve invested heavily in systems and technology that provide an efficient marketplace that’s available to our constituents whenever and wherever they are doing business. Beyond the convenience, technology enables an aggregation of a growing industry data set that allows us to tailor our services to market need.

SHB: Looking into your crystal ball, what do the next 12 months hold for seniors housing?

Colliers: I see more and more campuses built as a full continuum of care and very little standalone memory care built. 

Hazzard: Our industry will continue to evolve as the needs of residents change. As more seniors reach the average age of residents living in seniors housing, occupancy will begin to stabilize. We also believe that some recently opened facilities will struggle with trying to meet projected incomes and will be put on the market with asking prices significantly less than debt owed.

Bissell: With the slowdown in new construction, we anticipate occupancy levels will begin to gradually tick back up, and many of the assets stuck at lower occupancy levels will begin to see some improvements in performance. Interest rates will remain low, and lenders will aggressively compete for deals. This is a great environment for buyers to pick up assets on the upswing, using attractive bridge or agency financing.

Sacco: I expect the next 12 months will largely mirror the past year. In other words, I still anticipate healthy activity across the seniors housing space with little slowdown on the acquisition front barring only macro shifts. New construction has been somewhat choked off by the debt capital markets. However, that is largely in markets where oversupply already exists today. Merited new construction projects are still being successfully developed in markets with some levels of barrier to entry, provided that there is a true demand function for purpose-built seniors housing.

Clousing: If there are no shocks to the financial markets and supply is kept in check, I anticipate much of the same for the next 12 months. There will be a premium for performing assets, but still a market for well-located and well-designed buildings that are not fully operating.

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