As the senior population increases and construction costs continue to rise, redevelopment may become a key to success.
By Todd Hudgins, Senior Vice President of Senior Living, ERDMAN
While some developers can still execute on a low-cost basis in a middle-market demographic, it’s harder to make these projects pencil out. Coordination of the land cost, site preparation, design fees, construction budget and schedule must be in sync with each other to maintain a low-cost project.
Consider the recent American Seniors Housing Special Issue Brief. It reports that construction costs continue to rise. Meanwhile, 54 percent of middle-income seniors will not have enough resources to pay for seniors housing by 2029. Yet, such a population is increasing dramatically.
This gap of people lost in the middle grows deep and wide. It’s a story of the haves and have-nots. The have-nots will be heavily supported through government programs. The haves will pay their way into private seniors housing. It is those caught in the middle that create the middle-market gap. This group typically doesn’t qualify for assistance with housing and care. Yet, this group also doesn’t have enough money saved for privately paid housing and care, but will eventually require support.
The solution will come in many forms, but all will require innovation and creativity to be properly executed. Two areas to consider are adaptive reuse and integrated project delivery.
An old solution to a new problem
Adaptive reuse of existing buildings has been around for generations. As we consider this strategic approach amidst the COVID-19 pandemic, many industries have been impacted. The hospitality industry is among those that were hit the hardest. CBRE reports that occupied room nights across the U.S. were down 37 percent in the middle of 2020.
It’s likely that many hotel owners will face difficult decisions within their portfolios. Some will hold on for the recovery. Some will divest. Some will look to invest and possibly reposition. While all of this has presented a significant issue for investors that hold hospitality assets, it just may provide a solution for middle-market seniors.
To the untrained eye, many hotels look like the perfect asset to convert into a senior living community. After all, both building types have a significant number of units with private bathrooms for residents. An abundant amount of common space is typically available. Some hotels are even equipped with a full kitchen and dining space. Additionally, parking is readily available. It’s a perfect fit, right?
Not so fast. It can be a perfect fit. However, the checklist to identify a fitting adaptive reuse project is lengthy. Breaking the checklist into groups and prioritizing certain items is a good way to create several “go” and “no-go” stage gates. It will allow you perform the necessary due diligence and spend the least amount of time and money before making a final decision to go forward on a project.
As a first step, consider a location where supply and demand in the primary market area supports additional units. If there is unmet demand for seniors housing in a specific location, you should next ask yourself “does the site have good visibility?” Also ask, “will people be able to easily find it? Is it close to other amenities that would enhance seniors’ experiences? Are there kitchen, dining and other common spaces for your desired program? What about zoning?” These questions should be answered before moving through this stage gate.
Assuming you check the first few boxes in assessing a location, pivot to inspecting a building’s physical plant. Knowing the life expectancy of major building systems is paramount. Like any other acquisition, the due diligence list is long. A full building inspection will be required.
Things you’ll want to be mindful of as part of this process include:
- An emergency generator in the building
- Structural building elements to support reconfiguring interior spaces
- Common areas adequate for the desired program
- Conversion of rooms to align with the desired program (e.g. consider the bathroom door widths, bathtub to roll-in shower conversions, and studio to single and double room reconfiguring).
Depending on your assessment of a building’s physical plant, this is another stage gate that could end with a “no-go” decision.
If a property is still a “go,” code compliance is next in your building evaluation checklist for an adaptive reuse project. Depending on the state and the senior living use required, there may be many different code requirements. One of the main codes to pay attention to is accessibility, which is typically reinforced by governing institutions.
Work out a property and budget
Assuming the property makes it through all these stage gates and checks the necessary boxes, developing your budget is next on the list. The aforementioned check boxes all come with the caveat that a few dollars might be required.
The goal is to open the doors to this property with a low enough cost basis that rents can be kept affordable for the middle market. If the budget is in line with the desired programming, and an operations proforma allows an investment thesis to be successful, the project may have a greater likelihood to be a “go.”
Before you begin searching for hotels, there is another fundamental way to reduce costs, mitigate risk and create predictability in the development process. Said differently, if you integrate all aspects of delivering a new building, renovation or addition, you’re better positioned to reduce risk, increase speed and add predictability.
After all, whether it’s new construction or adaptive reuse, efficiencies are always welcome and can enhance the investment.
Let’s revisit the different steps involved to deliver a successful adaptive reuse project:
- Identify the region
- Identify the operator with the resources to be successful in that region
- Identify the community profile and residents that fit in the operator’s sweet spot
- Identify and control a site in the market that meets those criteria
- Test fit the community to the site
- Create an investment thesis for the project
- Begin the municipal approval process
- Begin the schematic, design and construction documents
- Build the construction budget
- Apply for permits
- Pursue construction
- Receive certificate of occupancy
The risk that a project will not move forward can occur at any step noted above. However, the biggest risk is time.
If you get through the stages efficiently, you can spend less money in holding and pursuit costs. The quicker you make a “no-go” or “go” decision, the better.
Now, ask yourself, “what if you could have some of above steps happen simultaneously?” For example, perhaps you have a team beginning to estimate within a region while another team is test-fitting a community to a site. What if you also have a team simultaneously working with a city on zoning criteria and approval processes?
As you consider the answers to these questions, one thing is for sure: if estimating and preconstruction teams are sitting at the table giving real-time feedback to the planning and programming team on costs, the final design program would be reached in half the expected time.
Additionally, when that final program is reached and a budget is made, designs can follow the budget instead of budgets following design. Target-value design saves time and risk. Specifically, you can avoid having to follow a process comprising design, bid, value engineering, design again and then rebid. By recognizing opportunities to increase speed, you can reduce risk and minimize costs.
Be predictable
Finally, a project should strive for predictability of outcomes. The next largest cost to a project is schedule delays and change orders. These must be avoided.
Integration of efforts on the front end will mitigate this risk. An integrated approach will also have the construction team out in the market well ahead of time garnering commitments from suppliers and subcontractors.
The materials that tend to take the longest to procure must be ordered well in advance. Identifying those materials early in the process and forming relationships with their suppliers will help to make sure they are delivered on time.
Also consider change orders, as they can be a huge project roadblock. In the instance an owner requests a change, an integrated model can offer efficiency among all stakeholders under one roof and keep the project moving forward. In other words, when the contractor and architect wear the same logo as members of the same team, the problem does not end up in the owner’s lap as a change order.
If the seniors housing industry is to successfully address the growing affordability challenge for middle-income older adults, new ways of thinking will be required. Innovative approaches such as adaptive reuse of former hospitality properties and integrated project delivery are just two of the many potential strategies available to providers and developers looking to tap into this burgeoning market.
Success will come to those who ask the right questions and persist in thinking well outside the traditional senior living box.
Todd Hudgins leads ERDMAN’s senior living team. He is responsible for driving strategy to serve the seniors housing market.