CBRE Research: Cost of New Development Has Increased 17.8% in Last Two Years

DALLAS — Seniors housing development costs have risen sharply over the past two years, with labor and land the primary drivers of higher expenditures, according to new research from CBRE.

The average cost of a seniors housing development has increased by 17.8 percent since 2020 to $317,400 per unit, or $333 per square foot.

Dallas-based CBRE derived data from the valuations of 142 seniors housing developments scheduled for delivery. The properties in the data set included independent living, assisted living and memory care communities.

Average returns (stabilized net operating income as a percentage of overall development costs) fell to 8.6 percent in the first half of 2022 compared with 9.6 percent in the first half of 2020. The decrease is attributable to significant higher costs combined with a slightly slower market rent growth.

Hard costs (labor, sitework, foundation, building shell construction, roofing, interior finishes, landscaping, signage) represent the largest portion of total development cost at 70.2 percent, followed by soft costs (inspection fees, construction loan-related costs, architectural/design costs, project management) at 18.5 percent, and site acquisition costs at 8.2 percent.

“The cost to develop a seniors housing project is rising sharply, fueled by higher labor and materials costs, operating deficit reserves and entitlement outlays,” says Daniel Lincoln, national practice leader of seniors housing and healthcare for CBRE Valuation & Advisory Services. “Due to a slow post-COVID recovery in occupancy, market rents have been below the level needed to support new development in many markets. A more balanced market could be on the horizon as many high-end communities are fully occupied and poised for rent increases.”

“Given the gap between average contract rent at seniors housing communities delivered between 2016 and 2021 and the rents required today to justify new development, we expect above-average rent growth for core assets in the majority of major U.S. markets in 2023,” concluded Lincoln.