Confluent Builds for the Future

by Jeff Shaw

With a $500 million pipeline, the developer is one of the few currently working on ground-up construction projects.

By Jeff Shaw

With borrowing rates at a 20-year high, the cost of construction extremely high in its own right, and suitable development sites becoming harder and harder to find, very few seniors housing builders are breaking ground right now.

In the private-pay seniors housing segment, year-over-year inventory growth nationally was 1.3 percent in the third quarter of this year, according to NIC MAP Vision. That figure is near the smallest year-over-year increase since 2012. The number of seniors housing units under construction relative to the total existing seniors housing inventory was 4.7 percent in the third quarter, down 300 basis points from the recent high of 7.7 percent recorded in the fourth quarter of 2019 and the lowest since 2014.

Many developers have taken on the mantra of “Survive ‘til ’25” — meaning weather this current storm, and then reset growth plans in 2025.

Confluent Senior Living isn’t willing to remain idle, however.

The Denver-based company, a subsidiary of commercial real estate developer Confluent Development, announced in August that it is rolling out a $500 million seniors housing development pipeline.

“They’ll all be slated for an early 2025 groundbreaking,” says Matthew Derrick, managing director of Confluent Senior Living, who leads the subsidiary.

Confluent Senior Living’s portfolio currently totals 13 communities and about 1,400 units, plus one community under construction. The units are approximately 70 percent assisted living and 30 percent memory care, and most communities offer both types of services. Several of its properties also offer independent living.

“We are primarily a ground-up developer, but we are also opportunistic,” says Derrick. “We are actively evaluating value-add acquisition opportunities for senior and active adult communities.”

While rents vary widely by market — Confluent’s portfolio is nationwide — Derrick describes rents as “on the higher end, in the top quartile.”

“We’ve rarely entered a new market and been the price leader. We want to build a community at a price point people can afford. That can be a challenge with today’s labor costs, but that’s always our goal.”

Why ramp up development now?

Confluent is not immune to the headwinds facing the seniors housing industry. Derrick notes that the company’s development efforts “slowed down significantly” in the wake of the COVID-19 pandemic. 

“Seniors housing has experienced similar cost increases as the rest of the real estate development industry. As Confluent is a national developer, we see drastic differences in the cost to build a community based on the specific market, scale of the community and unit types offered.”

However, he also notes that construction prices are starting to soften. If the “Survive ‘til ‘25” mantra turns out to be accurate, Confluent building its development pipeline now could put it ahead of the game.

“My philosophy is that these projects take so long to complete. From the time you find the site to completion of construction, we’re not opening our doors for three to four years,” says Derrick. “If you look at the trends, we anticipate that will be right in the middle of the recovery for the economy and the seniors housing industry. We want to ride that wave.” 

“There’s been a tremendous decrease in supply in recent years and an increase in demand with the aging of the baby boomers,” he continues. “It’s created a perfect storm for a really great recovery for the seniors housing sector. It takes a bit of courage to lean in, but we feel it’s the right time to pursue A-plus locations with great operating partners.”

(Approximately 10,000 Americans will turn 80 every day starting in 2025. By 2030, all 73 million boomers will be of retirement age.)

The reason Confluent is able to act now while so many other developers remain on the sidelines may have much to do with the company’s structure. With the parent company of Confluent Development, which builds projects in all commercial real estate types, there are experts on hand in all fields.

“The way Confluent is organized lends some benefit in our ability to pursue these projects,” says Celeste Tanner, president and chief development officer of Confluent Development. “We’re organized as teams of specialists. We have experts in-house. 

“In periods of maximum uncertainty, our team is able to mitigate the other risk factors as much as possible — entitlements, land use, working with municipalities. We have all those resources under our umbrella to mitigate the variables and challenges and give us the confidence to invest and capture that perfect storm.”

As a seniors housing specialist, Derrick appreciates these resources that many other developers may not have at their disposal. Confluent Senior Living was founded specifically because seniors housing is too specialized for a generalist team. But the parent company’s wider expertise can still streamline development in the seniors housing space.

“Our entitlements people have worked on industrial, multifamily, retail and more,” says Derrick. “They are learning the lessons from previous projects and bringing it over to the seniors housing space. Our finance team has creative solutions that they used on a mixed-use project and can bring that to an active adult community with a retail component. Having that knowledge and being able to apply it is beneficial.”

And where will the money come from to build this $500 million pipeline? For pre-development, Confluent is “fronting all the costs” for now, according to Derrick. Once sites and markets are chosen, the company will go to its network of institutional partners and ultra-high-net-worth individuals for investment dollars.

“Typically, we have a diverse base of capital that we will bring into these deals,” says Tanner. “We do that on a fund level, but then a deal-by-deal basis that allows us to pair the best capital with each particular project. In seniors we’ve had a healthy mix, but predominantly high-net-worth individuals.”

Operators buy in

Some of that investment money will come from Confluent’s operator partners as well. 

To date, Confluent has largely worked with national operators HarborChase and MorningStar Senior Living, and the operators generally have a financial stake in each individual property they manage.

“That helps create alignment,” says Derrick. “They have an interest, so everyone’s aligned to the goal, which is success of the property.”

Derrick notes that while Confluent “can make a property look beautiful,” it’s the operators that create a culture and “atmosphere of joy, family and community.”

“That’s created by our operating partners. That’s why we put so much focus on those. There are a lot of great developers out there, but our operators are so key to our success and the well-being of our residents.”

Tanner says HarborChase and MorningStar were chosen as partners back when the company first entered the seniors housing space. The selection process was long and involved, as she knew the company’s senior living success or failure would hinge on the operators.

“We went out and interviewed numerous groups. What we started to home in on at the time were operators that had just the right scale. They had enough operating history and a large enough portfolio that you knew they were good at what they do, but they had not reached a threshold where you risked compromising care by expanding further. The reality is that’s a pretty rare formula we’ve been able to find.”

Although HarborChase and MorningStar were already working with Confluent before Derrick’s arrival at the company, he says he’s thrilled with the two partnerships.

“It’s important that we enjoy and trust the people we work with. Everybody’s a great partner in great times. We need someone who’s a great partner in challenging times like we’ve had the past few years.”

‘Slide down the acuity scale’

While Confluent’s current portfolio is almost exclusively focused on assisted living and memory care, with several communities having a large independent living component, the new pipeline will lead them into a new sector that has long been a target: active adult.

“We’re very focused on having more independent living in our future development projects and adding active adult as a new asset class to pursue,” says Derrick. “We want to slide down that acuity scale. It allows us to add some affordability there as well. We want to bring a more attainable offering to the market.”

The crux of this move is to expand the potential customer base. More than half of assisted living residents are age 85 or older, according to a new study released this year by the National Center for Assisted Living. 

Derrick estimates the average active adult resident is 72 years old — meaning active adult is an opportunity to “get those baby boomers early on.”

“It’s an opportunity to present an offering to a greater population of seniors rather than waiting for them to age 10 more years,” he says. “If you put yourself in the shoes of a 72-year-old, they can either move into senior living, which they may not be ready for, or move into a regular multifamily community with folks that are significantly younger than them.

“They’re not looking for that. They’re looking for a community with amenities to cater to their lifestyle. There’s not enough of those, so we see a huge opportunity.”

“Seniors are demanding that type of environment,” adds Tanner. “They like the idea of a like-minded community of seniors with an elevated level of programming.”

In addition to widening its scope of demographics by adding lower-acuity product, Confluent is also opening itself to a wider range of markets.

“Before the development and new construction started a downward trajectory just before COVID hit, a lot of the pipeline was in the core markets,” says Tanner. 

“We’ve always prided ourselves as a developer to meet the demand across the country wherever it makes sense. There are seniors aging in place in their communities everywhere. We’re developing in primary markets, but we know there’s strong opportunities in all time zones.”

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