LOS ANGELES — The challenges in the commercial real estate lending market that emerged in the fourth quarter of 2022 — highlighted by the sharp rise in interest rates — still linger and have forced seniors housing developers, investors and operators to adjust their strategies.
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“We’re in an era now where there’s a lot of turmoil, I’d say, from an ownership standpoint,” said David Eskenazy, CEO of Scottsdale, Arizona-based Cogir Management USA, during a panel discussion at Interface Seniors Housing West at the Omni Los Angeles on Feb. 20.
The favorable supply-demand curve of seniors housing attracted a lot of investors to the sector who didn’t understand how operationally intensive seniors housing is, said Eskenazy.
“The reality sets in when you realize that for every 100 residents, we have about 60 humans that we have to employ to take care of them. And all of a sudden this doesn’t look like real estate anymore.”
Moderated by JP LoMonaco, executive vice president of valuation advisory services for CBRE, the panel also included Chip Gabriel, managing partner of Senior Living Transformation Co.; Kai Hsiao, CEO of Senior Living, Keppel Capital; and Traci Taylor-Roberts, president of Sodalis Senior Living. The day-long conference attracted more than 220 professionals from across the industry.
Many of “those beautiful buildings” that got built when the cost of capital was 3 or 4 percent are either coming out of foreclosure or going into foreclosure, creating new management and acquisition opportunities, said Eskenazy.
Cogir Senior Living, develops, owns and/or operates nearly 100 senior living communities nationally. In October 2024, the firm opened Cogir of South Bay, a 159-unit independent living and assisted living community in Torrance, California, about 20 miles south of downtown Los Angeles.
Cogir Management USA continues to grow. The company ranked No. 16 on the American Seniors Housing Association’s list of top 50 U.S. seniors housing operators with 9,757 units in its portfolio spread across 80 properties as of June 1, 2024. Cogir’s ranking in 2023 was No. 24 with 7,249 units across 57 properties. Measured by units, that’s a year-over-year increase of 34 percent.
“We’re taking over a lot of [properties] that aren’t stabilized but could be and should be and will be. That’s what’s causing a lot of the commotion. Before the pandemic — people forget this — we had a lot more supply coming [on line], and the absorption was lagging. And the first thing the pandemic did is it emptied the buildings a little bit before we were able to start filling them again. So, that didn’t help things either,” recounted Eskenazy.
Lenders are putting a lot of pressure on seniors housing owners, emphasized Eskenazy. “A lot of owners that came in are getting out. That’s also causing some discounting and some really nice deals. Buildings that were built for $400,000 [per unit] are trading for $250,000. And so, like everything else, there’s opportunities in that.”
Secondary Markets Beckon
Sodalis Senior Living, headquartered in San Marcos, Texas, has made a significant shift in its development strategy over the past few years out of necessity, said Taylor-Roberts.
“There were a lot of us that that were starting developments in primary markets, and then that came to a sudden halt because [the projects] absolutely could not and would not pencil out. They still don’t in most of your primary markets. And so, we had to shift our thinking,” she explained.
“Then we started looking at secondary markets. Not only did we start looking at secondary markets, we started looking at changing the way that we designed our buildings. We started removing common space, putting more units in there.”
Sodalis currently operates 23 assisted living and memory care communities and 13 independent living properties, according to the firm’s website.
The company still owns land in at least one primary market, but Taylor-Roberts doesn’t expect it to get developed anytime soon. “I’ve got wonderful land, if anybody wants to buy it in Austin, Texas, that I’ll probably never, ever get to pencil out.”
The acquisitions strategy at Sodalis also has shifted, noted Taylor-Roberts. “The last couple of years have been super interesting from a buying perspective. I’m more interested in buying something that’s middle market and putting CapEx into it because it seems to go further than developing right now.”
Why Centralize Functions?
Profit margins for Sodalis at its middle-market buildings are quite healthy, said Taylor-Roberts. She believes an integral part of that success is the centralization of many management positions.
For example, there is not a business office manager or assistant administrator stationed at each Solaris building. “I don’t need them. I can hire somebody for $65,000 or $70,000 and have them do it for 36 communities.”
The COVID-19 pandemic taught Taylor-Roberts the importance of centralizing certain job functions. During that period, she was able to pass the cost savings along to the frontline staff in the form of higher wages, which in turn helped reduce employee turnover. She also didn’t rely on any agency staffing during the COVID crisis.
“You can serve a middle-class market really well, but you can’t serve a middle-class market like you did 10 years ago or 15 years ago or 20 years ago,” emphasized Taylor-Roberts. The key she said is to hire fewer managers, leverage technology to the fullest and consider outsourcing certain functions.
“At a lot of the communities that we acquire or we take over, the very first problem that they’ve got is actually not [the quality of] care or labor. It’s too much labor in the wrong place. Too much money is going to the wrong place. The money that they should be paying to their frontline staff is not allocated correctly.”
Investment Sales Volume Rebounds Slowly
The investment sales market is improving, but only incrementally, according to Hsiao, who heads the senior living segment of global asset manager and operator Keppel Capital, which expanded into the senior living sector in 2018. “When you say 2024 was a pretty good year, let’s put a disclaimer on that: 2024 was a pretty good year compared to 2023. And 2023 sucked, right? Once the debt markets crashed in the fourth quarter of 2022, everyone went through a lot of pain.”
Hsiao said he had a lot of heart-to-heart conversations with operators in 2023 who did a lot of great work to improve their financial standing but were still “backwards” because interest rates rose further (The U.S. 10-year Treasury yield began 2024 at approximately 3.9 percent and finished the year at about 4.6 percent.) “Below the top line, they were still in a world of hurt,” observed Hsiao.
The volume of property and portfolio sales in 2024 was an improvement over 2023, but that’s largely because many of those deals had to get done, Hsiao noted. Many sellers were not meeting debt-service coverage.
“There was pain being felt. LPs (limited partnerships) were begging to get out. So, there were a lot of singles and doubles at most,” pointed out Hsiao. “You really didn’t see large portfolio transactions in 2024. Now everyone is talking positively about 2025 because I don’t think people want to live through another 2023 or 2024.”
The silver lining is that the capital markets woes experienced by the commercial real estate industry from late 2022 through today have curbed development significantly, said Eskenazy.
“This lull in supply is going to help us quite a bit over the next two, three, four years. We’ll be in a pretty stable environment, certainly by the time we get to three years or so from now.”
— Matt Valley