As competition heats up, some turn to smaller markets or infill opportunities while others experiment with product mix.
By Jane Adler
Memory care isn’t something senior living providers can afford to forget. The number of seniors suffering from memory loss continues to grow as families struggle with how to care for elders with Alzheimer’s disease and other forms of dementia.
Researchers estimate that 4.7 million Americans age 65 and above suffered from Alzheimer’s in 2010, a number expected to triple to approximately 13.8 million by 2050.
As the demand for services has grown, so too have the number of buildings that offer memory care.
And competition is heating up. There were about 113,000 memory care units across the top 140 markets at the end of 2016, according to the National Investment Center for Seniors Housing & Care (NIC) based in Annapolis, Md. About 10,000 units of memory care were added last year.
Established memory care providers with freestanding facilities continue to expand. Additionally, many new assisted living buildings now offer a memory care wing.
The wave of new development is hurting occupancies, especially in certain markets. As of the fourth quarter of 2016, the five markets with the lowest memory care occupancy rates in the top 31 markets were San Antonio (70.1 percent), Dallas (75.6 percent), Las Vegas (80.1 percent), Kansas City (80.5 percent), and Chicago (81.4 percent).
The top five memory care markets based on occupancy rates were New York (93.3 percent), Pittsburgh (92.3 percent), Washington D.C. (92.1 percent), Baltimore (92 percent), and Portland (91 percent).
Though the break-even point profit-wise for occupancy varies by operator, most underwrite projects to at least a 90 percent occupancy rate, and some go as high as 95 percent.
In response, developers are tweaking their strategies. They’re picking new locations carefully, avoiding overbuilt markets and seeking infill spots with little nearby competition. Developers are also clustering their projects in select cities in order to streamline management and concentrate marketing muscle.
“There’s no question you have to be strategic,” says John Barbee, executive vice president of the LaSalle Group based in Irving, Texas. Considering the volume of new project developments underway, it could take 18 months to two years for demand to catch up with the supply of memory care units, explains Barbee. “Everyone has to make adjustments and think outside the box,” he says.
The LaSalle Group owns and operates 42 freestanding memory care communities branded as Autumn Leaves. Another community is nearly ready to open and eight more are currently underway. Most of the properties are concentrated in Georgia, Illinois and Texas.
Up until about four years ago, LaSalle focused on major markets. But now the company is developing buildings in smaller markets, such as Venice, Fla., and Greenville, S.C. Another LaSalle strategy is to seek sought-after parcels in healthy housing markets.
For example, LaSalle recently opened a 50-unit facility in Overland Park, Kan., an affluent suburb of Kansas City. The parcel was a “hot” corner, according to Barbee, near a pocket of new housing. Single-family homes in the area range in price from $400,000 to $500,000, a good indicator that families can afford expensive memory care for an elderly relative.
The cost of memory care at an Autumn Leaves facility ranges from about $6,000 to $7,000 a month, depending on the market. Areas with high land costs result in the highest rents.
Overland Park was a desirable location for another reason, says Barbee. The town is development-friendly, but also has strict requirements. “They are on top of their game in terms of what they want,” says Barbee. “We are looking for that kind of suburb.”
He explains that town officials really know what services they need, including memory care, and they take a very sensible, business-like approach with new development.
The infill approach
Developers like infill locations too. There’s usually less competition in spots where land is less available. And densely populated areas offer a deeper pool of potential residents.
Anthem Memory Care has two infill projects underway in the Chicago area. The company develops and operates freestanding memory care buildings, and opened its first facility in 2011. Anthem currently has 10 facilities up and running, plus the two under construction in Illinois, and six other projects in the planning stages. Anthem’s projects are located in Kansas, Illinois, Colorado and California.
The infill projects now underway in the Chicago area are located in Glenview and Oak Lawn, established suburbs with little available land. As a result, both projects are two-story facilities, the first of their kind for Anthem. The company’s other projects are one-story designs with either 54 or 66 units built around two large courtyards.
“We are choosing to go into places where it is harder to develop,” says Isaac Scott, principal of Anthem Memory Care based in Lake Oswego, Ore. He prefers areas with high barriers to entry where land is scarce and the municipalities have significant entitlement hurdles. The entire development process in such markets can take 36 to 40 months versus 18 months in locations with few constraints.
Anthem uses a proprietary algorithm to pick new locations. The formula considers the incidence of memory loss for five different age cohorts, and how many residents in a three- or five-mile area would need 24-hour care. Area incomes are then overlaid on those results, along with the current and expected supply of memory care units to determine whether the market can support a new project.
For example, the company divides Los Angeles, one of its development targets, into 500 one-mile market rings. The algorithm is applied to the market rings to create a kind of heat map to show where a development should be located.
Scott says a high-barrier-to-entry location will result in higher rents and a quicker lease-up. “It really solidifies operations of the building for the long term,” he says. “Markets where it’s easy to build are too risky.”
Land prices in desirable locations are rising, mostly due to competition from multifamily and homebuilders, say developers. “There are no great deals out there,” notes Anthem’s Scott.
Land prices have spiked 20 to 50 percent over the last few years in markets such as Orange County, Calif., Los Angeles County, the San Francisco area and Seattle. The cost of an acre of land in these markets is approaching $2 million, according to Paul Mullin, senior vice president of development at Silverado Senior Living. The Irvine, Calif.-based company owns and operates 36 freestanding memory care facilities. Three more are in the planning stages.
Construction costs are rising. Over the last 12 months, material and labor costs have increased 6 to 12 percent, according to developers.
Labor is scarce, too. One development team travels with its own subcontractors, bringing them to work on new job sites in different cities. That avoids the scramble for local workers. “It’s a subcontractor’s market,” says Barbee at the LaSalle Group.
Freestanding versus combo
Amid the wave of new development, a debate is emerging as to whether a freestanding memory care building is preferable to one that offers both assisted living and memory care in the same footprint.
In 2016, about 72,000 memory care units were located in continuing care retirement communities or majority assisted living facilities, more than double the number located in freestanding memory buildings, according to NIC. Assisted living buildings accounted for about 7,000 new memory care units in 2016, compared with 3,000 units in freestanding memory care buildings.
Koelsch Communities owns and operates 22 buildings and has focused on the development of freestanding memory care facilities over the last eight years. Like other senior living providers, the company tends to cluster its projects in specific markets. Koelsch has multiple properties in Dallas/Ft. Worth, Chicago, Phoenix, Seattle and Vancouver, Wash.
The company recently opened Northbrook Inn, a freestanding memory care facility in Northbrook, Ill., an upscale suburb of Chicago. The building contains 45 units and can accommodate 68 residents, typical of the company’s memory care projects. The buildings are designed in the shape of the letter “P” so residents who wander can safely walk around the central hub under supervision.
Terry Hanson, vice president of business development at Koelsch, says there are pros and cons to freestanding memory care projects. On the plus side, a facility dedicated to memory care can tailor programming for residents with very special needs (see sidebar). “It’s the best care model,” says Hanson.
About 50 percent of the residents at Koelsch’s memory care facilities most recently lived in their own homes. The other half came from an assisted living building.
Interestingly, Koelsch is building independent living units adjacent to its memory care project in Surprise, Ariz., but not assisted living units. The company’s thinking is that independent living units will attract younger residents who will then age in place with home health or other services brought in to their apartments. “Assisted living is overdone,” says Hanson. “It’s getting squeezed.”
A focus on freestanding memory care is seen as a plus at the LaSalle Group. “We believe we are one of the best providers in the space,” says Barbee. “Why mess with a good thing?”
The blended blueprint
Watermark Retirement Communities is taking an approach common in the industry today. Its new projects are a combination of assisted living and memory care units. Watermark owns and operates 38 buildings and serves as a third-party manager for another property.
The company has five new projects underway. Each one includes a memory care component coupled with assisted living, or with assisted living and independent living.
“If there is a need for assisted living, there is a need for memory care,” says Rich Howell, managing director at Watermark Retirement Communities, a developer and owner based in Tucson, Ariz. “So you try to build both.”
A high percentage of assisted living residents have some memory loss, notes Howell. A memory care component allows residents whose diseases progress to stay in the community and receive the programming and staffing they need. New residents know they can get memory care services if needed in the future. “That gives them comfort,” says Howell.
Watermark has a new project underway in Tucson, Hacienda at the River. The community will feature three buildings: assisted living (50 units); memory care (20 units); and skilled nursing/rehab (65 beds).
The 20-unit memory care building is the right size to deliver the kind of intensive programming and services needed by those residents, says Howell. The staffing ratio in memory care is higher than in assisted living. The memory care staff provides about 3.5 hours of care a day to each resident compared with 1.5 to 2.5 hours a day in assisted living.
The memory care building includes a dining room and open kitchen where residents can get their own drinks and snacks. The building has two courtyards. “The design mimics a home,” says Howell.
The combination of offering memory care and assisted living in a larger community creates additional programming opportunities for the memory care residents.
For example, Watermark’s Hacienda at the River project is being built on a seven-acre site previously occupied by a horse ranch. Dovetailing on that theme, the community will feature a stable and paddock. Watermark is working with a local equine therapy program that will bring horses to the property.
Residents will be able to interact with the horses, groom them and eventually possibly ride them as well, explains Howell. “Horses are good for people.”