CBRE: Rising Labor, Land Costs Hit Seniors Housing, But Returns Also Rise

by Jeff Shaw

LOS ANGELES — Seniors housing development costs are expected to rise modestly in 2020, with labor and land the primary drivers of higher expenditure, according to research from CBRE, a global real estate services and investment firm based in Los Angeles.

Total cost for a seniors housing development rose by 6.4 percent in 2019 to an average of $317 per square foot.

Average returns (stabilized net operating income as a percentage of overall development costs) rose to 9.5 percent, up approximately 60 basis points in 2019. This is attributable to an uptick in perceived risk due to lower occupancy rates on a national basis.

“While seniors housing development activity is expected to remain strong in 2020, returns on cost expectations have increased, which is evidence of elevated perceived risk,” says James Graber, managing director of valuation and advisory services for CBRE. “Developers are applying a more rigorous project selection process to position each planned community for success; this disciplined approach has resulted in a tempered number of construction starts projected for this year.”

“Overall, the ‘flight to quality’ is a primary driver in the seniors housing development process, incorporating a well-organized collaboration between developer, operator and capital markets,” concludes Graber.

Hard costs (e.g. labor, site work, foundation, building shell construction, roofing, interior finishes, landscaping, signage) represent the largest portion of total development cost at 66.8 percent, according to CBRE. Soft costs (e.g. inspection fees, construction loan-related costs, architectural/design costs, project management) are 19.5 percent, and site acquisition costs at 10.1 percent.

CBRE Valuation & Advisory Services, which completed valuations of more than 2,000 seniors housing properties across the U.S. in 2019, derived data from the valuations of 317 seniors housing developments scheduled for delivery. The properties in the data set include a mix of independent living, assisted living and memory care communities.

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