The number of units increased by 8 percent over a 12-month period in the nation’s largest 99 markets, NIC data shows
By Jane Adler
With the construction boom of the 1990s and its unfortunate aftermath all but forgotten, memory care is taking center stage in the latest building wave to hit the seniors housing industry.
The rise in the number of older adults with memory-robbing diseases, plus the allure of high profit margins, is boosting supply. Building operators are adding memory care units and wings to existing facilities. Developers are building new freestanding memory care properties. Investors are jumping into the market, too.
But signs are emerging that new construction is overheating. Occupancies are near all-time lows. More memory care units are in the pipeline. Some individual markets are probably oversupplied, sources say, and price-cutting is already underway.
Seasoned observers wonder if new operators, who are unfamiliar with the nuances of managing a difficult resident population, will be able to provide the kind of services that consumers should expect. Meanwhile, experienced developers and operators are fine-tuning their models to stay a step ahead of the new competition.
“It’s a hot market,” says Paul Mullin, senior vice president of development at Silverado Senior Living, a memory care developer and operator based in Irvine, Calif. “Memory care is a much-sought-after product.”
Consumer demand for assistance with the daunting task of caring for a senior with memory loss has helped to spur the boom. An estimated 5.1 million Americans age 65 and older have Alzheimer’s disease, the most
common form of dementia, according to the Alzheimer’s Association.
Unless a medical breakthrough occurs to prevent or cure the disease (see sidebar, page 35), the number of people with Alzheimer’s is expected to triple to 13.8 million by 2050.
At age 85, somewhere between 20 and 50 percent of people have signs of the disease. And with an average age of about 82 for new residents at the time of move-in, seniors housing operators are well aware that many of their residents already have some impairment.
“A lot of the development activity is focused on memory care,” says Beth Burnham Mace, chief economist for the National Investment Center for Seniors Housing & Care (NIC) based in Annapolis, Md.
New supply mushrooms
The number of memory care units in the nation’s top 99 markets grew by 8 percent from the third quarter of 2014 to the third quarter of 2015, according to NIC. That translates into 6,960 new units, bringing the total number of memory care units in the nation’s largest 99 metropolitan areas to 94,345.
About 11,526 memory care units are under construction, 3,300 of which are in freestanding buildings, reports NIC. The freestanding projects underway represent about 12.3 percent of the current inventory of 27,000 freestanding units situated in 585 buildings in the top 99 markets.
The 11,526 memory care units under construction account for 12.2 percent of all memory care units located in any type of building.
Among the top 99 markets, the occupancy rate in the memory care segment stood at 87.1 percent in the third quarter of 2015, up from 86.6 percent in the prior quarter, which was an all-time low, according to NIC.
Driving factors behind building spree
The ramp-up in construction can partly be attributed to assisted living operators adding memory care components to their buildings, says Mace. “A lot of operators are moving to offer a continuum of care.”
Memory care is viewed as a smart add-on to assisted living to lengthen the stay of residents. “This is a great product for many of the decision-makers placing parents with some light cognitive impairment into assisted living,” says Kevin McMeen, president of real estate at MidCap Financial, a seniors housing lender based in Chicago.
The new memory care wings being added to existing assisted living buildings often provide a different type of product than what freestanding memory care facilities offer, explains McMeen. The new memory care sections at assisted living buildings generally target seniors with mild impairments compared with freestanding memory care facilities that cater to a broad spectrum of residents, some with much more acute dementia-related problems.
A newcomer to the industry, the Bright Oaks Group, based in Oakbrook Terrace, Ill., has nine projects underway: five in Illinois and four in Florida. Bright Oaks will operate the buildings owned by Chicago-based Platinum Real Estate.
The Bright Oaks project in Naples, Fla., will be a freestanding memory care facility. The other buildings feature a mix of units — about one-third memory care and two-thirds assisted living. The company’s first memory care facility in Illinois, Bright Oaks of Aurora, is expected to open this January.
“We offer something different,” says Nader Kameli, president and CEO at Bright Oaks. The projects are designed with separate, purpose-built memory care and assisted living sections.
So-called “bridge” units will be available to accommodate mentally fit spouses and their partners suffering from memory loss.
Programming for the memory care residents will be tailored to their needs, and staffers in that section will undergo special training. Residents will also receive training, in a sense, on how to live in a community setting.
Employees will spend 30 percent of their time giving personal attention to residents, says Kameli. “We are intent on providing quality care.”
Established memory care developers are branching out, too. The Dallas-based LaSalle Group owns and operates 35 memory care buildings branded as Autumn Leaves.
Another nine buildings are under construction. One is a combination assisted living/memory care building — the first LaSalle project to include assisted living.
The average occupancy rate is 92 percent at LaSalle’s stabilized properties.
LaSalle is rolling out a new prototype. Each new freestanding memory care facility will span about 36,100 square feet and contain 54 beds. Resident rooms wrap around three secured courtyards to give residents more outside access.
By comparison, each of LaSalle’s original buildings spanned 28,300 square feet and included 46 beds.
The bigger footprint of the new prototype also allows for the addition of a larger spa, a quiet room to calm agitated residents and a dedicated exam room.
Prime locations are getting scarce and some markets are already saturated, sources say. Texas, for example, is regularly singled out as the poster child for excess. NIC data shows that 22 assisted living projects, many with a memory care component, are underway in the Dallas area. Another 118 units are being added in freestanding buildings.
LaSalle owns and operates 21 communities in Texas and two more are under construction, one in Austin and the other in San Antonio. “Our portfolio is heavy in Texas,” says John Barbee, LaSalle’s executive vice president of real estate. “No question there’s more competition.”
While some submarkets in major metros of the Lone Star State may still present development opportunities, LaSalle is looking to expand elsewhere. The company has plans for a project in Kansas City, Mo. The next target is the Southeast: Georgia, Tennessee, Florida and South Carolina.
Silverado has memory care projects in Texas, and elsewhere, but is exploring new markets as well. The company’s latest project is underway in Bellingham, Wash. “We’re finding places that aren’t too frothy,” says Silverado’s Mullin.
The company is looking to expand in tertiary markets, or in metro areas where Silverado already operates and there is strong demand for the product, such as Chicago and Milwaukee.
“It’s helpful to have a cluster of five to seven buildings in one market,” says Mullin. People on the waiting list at older Silverado properties can be shifted to open spots in new projects, he explains.
Meanwhile, the company is seeking to establish beachheads for clusters in new places, such as Seattle, Washington State, and possibly Vancouver, Canada.
Land is quite expensive, say seniors housing developers. For example, they can’t compete with multifamily builders willing to pay upwards of $1 million to $2 million an acre for prime spots in Orange County, Calif.
Competition for residents is putting pressure on pricing in some places, according to sources. Established operators worry that price wars could result in poor care for residents, thereby tarnishing the reputation of the entire memory care segment.
“Everyone wants to do memory care because they can charge higher rents,” says Kameli at Bright Oaks. His strategy is to offer memory care for about $4,500 to $5,500 a month — slightly less than what other operators often charge.
The Alzheimer’s Association reports that in 2014 the average cost of memory care in assisted living was $59,250 per year ($4,937 per month.)
Operators are the secret sauce
As more developers jump into memory care, the operator is becoming the key ingredient for success, say investors and lenders.
LTC Properties, a publicly traded real estate investment trust (REIT), held investments in 209 seniors housing and skilled nursing properties as of September 2015. The portfolio includes 13 freestanding memory care communities that are operational and another five under construction.
Two assisted living projects, one open for approximately two years and another under construction, include purpose-built, ground-level memory care sections with dedicated programming, thereby creating a memory care community that functions more like a freestanding project.
“When it comes to development, our focus is on selecting the right operating partner,” says Clint Malin, executive vice president and chief investment officer at LTC based in Westlake Village, Calif.
LTC’s goal is to align itself with growth-oriented senior living providers that have in-house development capabilities to develop and then operate properties for the long term.
The REIT’s operating partners for new assisted living and memory care projects include Anthem Memory Care, Thrive Senior Living, Oxford Senior Living and Clarity Pointe.
LTC owns eight freestanding memory care projects leased to Anthem, four operational and four under construction, and the company continues to evaluate additional opportunities with Anthem through an exclusive development pipeline agreement.
“LTC’s first project with Anthem, Highline Place in Littleton, Colorado, has had tremendous success by achieving an occupancy of 100 percent within four months after opening, and approximately two-and-a-half years later remains full,” says Malin.
“Not only has Anthem demonstrated its development capabilities, but its operational execution has also delivered strong performance with occupancies at the other three communities meeting or exceeding targets,” adds Malin.
LTC’s development strategy of targeting operators unfolded in 2010 when LTC recognized an opportunity to be the capital provider to entrepreneurial groups, led by seasoned executives, seeking to expand and grow an operating platform through the development of new freestanding memory care communities. Instead of a joint venture partnership, LTC utilizes long-term triple-net leases.
“This investment structure benefits our operating partners by mitigating the recapitalization risk typical in a joint venture structure,” explains Malin. In short, the investment structure contributes to stability and continuity in their operating platforms, he emphasizes.
He adds, “We have a common interest with our operating partners to make sure each project is viable and not on the margin given that LTC is a long-term holder of real estate and initial lease terms are between 10 and 15 years.”
Alignment of interests is paramount
MidCap Financial is bullish on the memory care sector, but is highly sensitive to the details of individual projects, including the alignment of interests among the participating parties.
“We believe this product serves a need in the marketplace and, with the right operator, can be very successful,” says McMeen at MidCap.
Last spring, MidCap provided a $9.9 million first mortgage for the acquisition and redevelopment of an existing medical office building in La Jolla, Calif. The property is being converted into a memory care facility and will include 26 units and 44 beds.
A newly formed joint venture between HG Capital, a private equity firm in Menlo Park, Calif., and ASL Monarch, a California-based senior living operator, owns the property.
Monarch and HG Capital intend to invest together to establish a portfolio of seniors housing assets in premier locations over the next several years.
For now, MidCap will avoid markets with excessive development projects that could struggle to fill up within a two- to three-year time frame, emphasizes McMeen.
MidCap will continue to finance memory care facilities, but each deal will be analyzed based on location, market demand, operator experience and competition, says McMeen. “Lending decisions for us are very transactional.”