More Flexibility, Consumer Choice Will Be Key to Future Seniors Housing Development

by Jeff Shaw

ATLANTA — With so many new facilities and operational models altering the seniors housing landscape, what will be the key to a successful seniors housing development in the future? According to panelists at the InterFace Seniors Housing Southeast Conference, the answer is flexibility.

Colleen Blumenthal, managing director with Florida-based seniors housing advisory firm HealthTrust, moderated the “State of the Industry” panel at the event, which drew approximately 315 industry professionals to the Westin Buckhead in Atlanta on Aug. 25.

The panelists included Richard Hutchinson, president and CFO of Florida-based owner-operator Discovery Senior Living; Joe Weisenburger, vice president of seniors housing for Ohio-based REIT Welltower; Kevin Pascoe, executive vice president of investments for Tennessee-based REIT National Health Investors (NHI); Charles Turner, president of Texas-based developer PinPoint Senior Living; and Mark Spiegel, president of Georgia-based developer Formation Development Group.

Flexible Spaces Create Agile Buildings

When asked about the successful seniors housing communities of the future, several panelists cited flexibility as a top consideration — including everything from room sizes to price point to use of common spaces.

“As we’re building new product, we’re trying not to have common areas that guess what the future trends are going to be,” said Spiegel. Formation has turned down several acquisitions because the space was too segmented, making renovations too difficult and expensive to enact a turnaround plan, he added.

The older communities, particularly those from the 1990s, tended to have smaller, single-purpose rooms throughout the building. Modern communities need to be more versatile.

This trend can be most readily seen in the dining programs, with new developments having as many as four separate dining venues, 24-hour dining options and flexible menus.

“We’ve all gone into the communities built in the ’90s, where everybody eats every single meal at the same place,” said Spiegel. “That gets old for obvious reasons.”

Incoming residents are demanding larger and larger unit sizes, said Turner. But bigger units leave less room for common spaces. The solution, he said, is to make flexible common spaces by combining specific-use rooms and making them multipurpose.

“You can’t just build this goliath structure to accommodate every need,” said Turner. “You have to be much more intelligent with design. It’s all about having more modular spaces.”

Flexible price points will also be a way developers of the future find success, said Weisenburger. A developer that can offer studios in addition to the large, multi-room units can capitalize on an underserved portion of the seniors housing market.

“We can develop the high-end communities, and we do a very good job at that, but the middle-market is more challenging,” said Weisenburger. “There is not a model any of us are developing that’s truly affordable to a lot of the market.”

Overdevelopment Concerns Breed Caution

Blumenthal noted the high rate of development in the seniors housing industry, and asked the panelists the impact of so much new product coming on line. According to the National Investment Center for Seniors Housing & Care (NIC), construction as a percentage of existing inventory increased 50 basis points from second-quarter 2015 to second-quarter 2016.

“Inventory grew 2.3 percent in the second quarter of 2016. Construction is about 6 percent of existing inventory, and even higher for assisted living,” noted Blumenthal. “How is this cycle different from previous ones?”

Before the Great Recession, development was driven by “euphoria” over the returns the industry was seeing, said Hutchinson. The current cycle is instead reacting to demand that supply was not yet meeting, which is a more stable way to develop.

“Just now we’re starting to get through the pent-up demand, and we’re wondering if we’re overbuilding or did it right this time,” said Hutchinson. “Those cards remain to be seen.”

Although overdevelopment is a concern, more cautious underwriting from lenders has helped restrain it, said Turner who suggested lenders in the space are both “smarter and more sophisticated” than in the past.

“The lending community is keeping what would otherwise be a major push in check,” agreed Spiegel. “They’re the first ones tapping the brakes as we look at potential oversaturation in certain markets.”

Turner warned that many of the newcomers to the seniors housing industry are doing so based on an exaggerated demographic phenomenon. The so-called “silver tsunami” of Baby Boomers turning retirement age is often used to convince developers to enter the space, but those seniors are still about 15 years from considering seniors housing, which has an average age of 85, said Turner.

“People are getting into this industry based on the fallacy of all these seniors coming right around the corner,” said Turner. “Well, it’s still going to be another few building cycles before that happens.”

Be Smart About Development

After record-setting pricing and deal volume for seniors housing acquisitions in 2014 and 2015, the market has settled down a bit. As a result, many real estate owners are switching from the acquisitions mode to development mode.

“There aren’t as many great portfolios out there right now. That’s why we have an aggressive development pipeline,” said Welltower’s Weisenburger. “That’s the way we’re going to find those Class A assets. At this point it makes more sense to develop than acquire.”

Development is tricky in its own right, especially when overdevelopment is a concern. But smart approach to a market can result in a successful community. Success means looking at a lot of factors, though.

Discovery’s Hutchinson suggested looking more at the “depth” of a market, rather than the size of a market. In other words, the amount of wealth and the penetration rate of seniors housing in a particular market is more important than the raw number of seniors there.

NHI’s Pascoe said that a big factor is not incoming competition necessarily, but beating that competition to market.

“If you’re the first to open, that’s much different than third or fourth,” said Pascoe. “If you can get into the market, get your lease-up going and build a base ahead of the competition’s arrival, that’s a key indicator for success.”

— Jeff Shaw

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