InterFace Panel Says Speed to Market, Operations Key in Seniors Housing Development

by Jeff Shaw

By Haisten Willis

ATLANTA — Seniors housing can be a uniquely challenging segment when it comes to development. Unlike traditional multifamily housing it is very involved from an operations standpoint and can be a tougher segment to enter.

These and other challenges were discussed by a panel as part of the InterFace Seniors Housing Southeast conference at the Westin Buckhead hotel in Atlanta. The hour-long panel was titled “The Outlook for Seniors Housing Development: What’s Being Built, Where, and are Supply and Demand in Balance?”

Alan Plush, president and senior partner of HealthTrust LLC, moderated the discussion. He opened by asking about the currently hot development cycle, which he estimated began in 2013.

“What do you see as the single biggest hurdle to getting a development off the ground today?” he asked.

David Hink, managing partner of Aspire Development partners, said speed to market is the biggest hurdle.

“The people we’re building for are 83 or 84 years old; the Baby Boomers aren’t going to be there for another 20 years,” Hink said. “We don’t have a three- or four-year run. It’s a lot shorter than that, so speed to market is important.”

Hink identified 18 months as the optimal time to move from looking at a site to breaking ground. Other developers on the panel identified a period ranging from 12 to 30 months, depending on the size of the development and local barriers to entry.

Plush’s next question was about how developers evaluate land for potential projects.

Hink answered that the price of the land is an important factor, but should not be a deal breaker if the property is in a good location that will aid lease-up.

“Never pass up a good piece of land because of price,” he said.

Frank Marro, president and CEO of Drever Capital Management, added that knowing the achievable rents is a critical factor in determining how much a company can afford to pay for a piece of land. Marro’s company typically evaluates how much it will be able to collect in rents, then works backward to learn what it can afford to offer for the property.

The next question concerned the rising cost of construction. Scott Gensler, vice president of business development for Erickson Living, said even a three-month delay on a new building will cause prices to rise significantly.

“People left the industry permanently [during the recession], found another source of income and now they need to get back in,” Gensler said. “I don’t know if it’s going to be a permanent craziness on the construction cost or if it’s just a little blip.”

Alan Moise, managing partner of Thrive Development Partners, added that materials prices have gone down but the labor pool is stretched, canceling out any potential savings.

“We’ve seen construction cost increases of over 10 percent a year for the last couple of years,” Moise said.

Plush then asked about issues regarding the stretched capacity of the businesses involved in construction because the industry is hot at the moment.

“At a macro level, there are architects and contractors out there that have experience and are available, it’s just a question of whether you want to go outside of our comfort zone,” answered Marro. “If you’ve used somebody three or four times, do you want to get involved with someone new?”

Moise added that local expertise is important, particularly when considering using an architect or general contractor based in another state.

Hink said he chooses his business partners based on long-term relationships.

“Turnover of staff and turnover of those relationships costs us money. It pays sometimes to keep them around,” said Hink. “On the operations side we have one of the higher costs of our employees, but we also have the lowest turnover. We think that value is there in the long term, so that’s where we focus.”

The next topic was finance.

“From the outside looking in, I see what looks like a fire hose of equity, debt, REIT money, of activity being focused on our industry,” said Plush. “On the inside, how does it feel?”

Hink agreed with the fire hose analogy but quickly added, “you don’t want to spend a lot of time drinking from it” because he likes to work with companies he’s built a relationship with.

Moise also agreed that there is capital available, but that underwriting hasn’t changed that much.

“There is still a lot of discipline at the instutiontal level, which is encouraging, but new entrants into the space can always be disruptive,” said Moise.

Operations was the next topic of discussion, specifically finding people with the expertise needed for development.

Everyone on the panel agreed that from a pure construction standpoint, developing seniors housing isn’t much different than building traditional multifamily housing. However, because operations are such an important part of the industry, the operating company should be involved in the project as early as possible.

Marro said there have been multiple projects where he wished he had involved the operations company sooner. The key is to find the operating talent as early as possible to have them work together with the developer. He added that finding operations talent often is more challenging than finding development talent.

Moise’s company, Thrive Development Partners, includes both operations and development.

“It’s critical for us, since we’re integrated between development and operations, that our operations team is involved in everything we do,” said Moise. “[The operations side] has approval rights over sites; they set market rents. We are very involved with each other in the way we operate as a development company and a management company.”

The final question was what Plush described as a wild shot: Are there any problems in our industry that are right in front of us that people don’t see?

Hink drew laughter from the audience with his response of, “the degree to which stupid people will quickly enter this market.”

Gensler answered that affordability is a key issue today, saying that a lot of people won’t have the wealth to afford seniors housing if costs continue to rise at their current rate.

“Something will have to change,” he said.

One issue is that everyone wants to build in the same place based on market data, said Marro. His business is focused on being cost-effective by building to a wider range of consumers than some competitors, from a financial standpoint.

“There’s a lot of projects where a developer will think it’s a great opportunity, then a long time passes and he’s still working on getting the deal put together,” said Marro. “By the time he gets there it’s no longer a good project, but he’s got $1.5 million sunk into it, so he does it anyway.”

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