LOS ANGELES — It’s no secret there’s a lot of capital chasing seniors housing deals. REITs aren’t selling, Boomers are still aging, and investors have a pool of money that doesn’t have a home. That’s according to panelists at InterFace Conference Group’s Seniors Housing West, held March 7 at the Omni Los Angeles. What does have a home, ironically, is the senior population.
Occupancy seemed to be stabilizing as the supply-demand scale evened out in the fourth quarter of 2018. U.S. seniors housing properties achieved an average occupancy rate of 88 percent during that time period, per the National Investment Center for Seniors Housing & Care (NIC). This figure was 10 basis points from the prior quarter, which placed seniors housing occupancy at its lowest level since the second quarter of 2011 when it was at 87.5 percent. The most recent fourth-quarter statistic was still down 70 basis points from the year prior, and 220 basis points below the market’s most recent high of 90.2 percent, which was achieved in the fourth quarter of 2014.
NIC further noted that the fourth quarter was the first period over the past three years where absorption kept pace with the delivery of new units.
Two of the largest challenges facing seniors housing are increasing costs and difficulties surrounding qualified labor. The first impediment often resulted in a minimum delay of three to six months in development timeline, Seniors Housing Development Outlook panelists noted. Rising costs and increased delays have made deals difficult to come by for most investors.
“There’s plenty of capital out there if the yield is right,” said panelist Bill Pettit, president and COO of R.D. Merrill Company. “But we’ve got so much pressure on costs, [particularly] the hard construction costs. Now there’s also uncertainty around soft costs and interest rates.”
Panelist Rob Leinbach, a principal with Cadence Senior Living, echoed those sentiments, acknowledging there are wants and there are needs…and then there are disciplined investors.
“We all want to be in Seattle but it’s really hard to find a land price that will pencil,” he said. “There’s more capital than there are deals, but you are getting increased scrutiny on your pro forma. Capital is demanding certain escalators.”
Taking on a new position
Value-add and repositioning plays can mitigate some of the costs associated with new ground-up development, but they require an experienced team as well. Panelist Paul Mullin, senior vice president of development at Silverado, noted there are $600 billion worth of post-acute assets that will hit the market shortly. Half of these assets are hospitals, while the other half are seniors housing spaces.
“There is a ton of hospital space that’s going to be coming back on the market and we need to figure out a way to make it fit our use,” he said. “We need the right architect and the right programmatic team.”
Leinbach has also seen an uptick in interest on the hospitality side.
“All of our acquisitions have been value-add acquisitions,” he noted. “I’ve probably been shown three hotel conversions in the past month. One of the things that’s happening with these buildings is they’re becoming obsolete. We have acuity treatment, but we need to also attract families coming in. We have to show we’re not just needs-based, but a conversion with all of this is super labor-intensive.”
Putting the right development team in place is the first step to creating an environment that is attractive to your clients and investors, Mullin asserted, but it doesn’t necessarily come cheap.
“If you’re going to take on a repositioning, it has to depend on superior quality from the start,” he said. “If you don’t have that, then you’re going to potentially be investing as much in a reposition as you would if you were building a brand-new building.”
Panelist Paul Dendy, CEO of Milestone Retirement Communities, noted that superior quality also meant moving away from any stark, formulaic standards of what seniors housing might have looked like decades ago.
“We’re repositioning our own assets right now, and not just freshening them up,” he said. “We’re changing to what the market opportunity is. You can’t have a cookie-cutter model. You discover opportunity based on your market’s demand.”
Moderator Alan Plush, president and senior partner at HealthTrust, noted there are a few motivations behind this need to adapt. Aside from the obvious, that is, which is increased competition.
“The industry’s evolving,” he said. “We can’t build a cookie-cutter building anymore. We now have to anticipate changes in technology.”
Multiple Uses, Multiple Opportunities
One way to potentially succeed, panelists surmised, was through a new hybrid concept that plays to the seniors’ sense of connection and community.
“There really is an opportunity for many of us to partner up and start looking at multi-use communities,” Mullin said. “That’s the future of what seniors want.”
This not only means seniors players partnering with other seniors players — such as independent living alongside assisted living — but with completely separate types of residential product.
“We believe this next generation of seniors is going to have different wants or needs where they access housing that features connectivity,” Mullin continued. “I’m talking about intergenerational connectivity. Intergenerational exposure will be worth the investment. Seniors are making a decision not just on a care facility, but on a new home.”
Some of those generations may be lured into the seniors housing field by the promise of walking to work, as many cities inch closer to the live-work-play environment.
“Creating workforce housing and having it on the same campus as seniors housing is a genius play,” Mullin asserted. “The biggest challenge by far is getting another million people into our business on top of the 1 million people already in our industry. It’s an enormous challenge we need to figure out.”
Leinbach can envision a world where all these elements are possible. Possibility and execution are two different things, however. So until that time, it may be promising enough to acknowledge these prospects are at least on the table.
“We are still an industry shifting our culture,” he said. “There is labor, there is mixed-use, there is infill development. There is still a lot of work to be done.”
— Nellie Day