The ideal development site takes into account several economic and demographic factors, say industry experts.
By Bendix Anderson
The new seniors apartments at the Solana Vintage Park have leased up quickly in Houston, one of the most crowded markets in the nation for seniors housing.
“Normally we would anticipate two years to fill up a building of that size,” says Mark Maberry, executive
vice president of Formation Development Group in Alpharetta, Ga.
Instead, the 87 new assisted living and memory care apartments were fully occupied this July, just 15 months after they opened.
Formation beat the odds by picking a strong site and creating a development that offers something different than the competition. “We knew we would have to bring a really good-looking building and a great team,” says Maberry.
Successful developers answer some tough questions before they commit to building a new property like Solana. They have to prove to themselves and their investors that local seniors will move in. To do that, developers must both identify a submarket with strong demand for seniors housing and find a desirable site to help them beat the competition.
Seniors housing tsunami
Across the country, seniors housing developers are building more new properties than they have in several years.
Developers launched more than 8,000 units of seniors housing in 2013 at communities where the majority of units will be assisted living, according to the National Investment Center (NIC) for the Seniors Housing & Care Industry based in Annapolis, Md.
That’s easily twice what developers started in either 2009 or 2010, and it’s a big increase from the more than 6,000 units started in 2012.
The new construction is largely concentrated in markets with strong job growth and few constraints on new construction — like Houston. The 1,934 seniors housing units now under construction in that metro area represent a whopping 12.9 percent of the existing inventory.
One might expect developers to run screaming, but Formation is planning to build another 115 independent living apartments at Solana Vintage Park, two blocks away from its assisted living building. That property succeeded because it stood out from the competition in its Vintage Park submarket, which had few new seniors properties within five miles.
Formation also has a strong operating partner in Brookdale Senior Living.
“If you’re delivering something new into a submarket that hasn’t seen anything new in a few years, I think you can do very well,” says Maberry.
Formation expects its planned independent living units will also find their niche. Most new construction under way is not independent living.
Nationwide, developers started less than 4,000 units in 2013 at projects in which the majority of units will be independent living, less than half the rate of construction during the last boom in 2006 and 2007.
Developers like Formation have made Houston the metro area where seniors developers are building the most new units, followed by New York, Dallas and Detroit, according to NIC.
In Texas markets such as Houston, San Antonio and Austin, projects now under way will increase the inventory of seniors housing by more than 10 percent. Strong job growth stemming from the oil and gas industry helps draw developers to Texas.
Knowing where to find demand
Developers look for markets and submarkets where a significant number of seniors are both wealthy enough to afford to live in private pay seniors housing and be in their mid-70s or older — the typical age at which elderly people want or need to consider moving into seniors housing.
Opportunities aren’t limited to big cities like Houston, where the number of households with persons age 75 or order is expected to grow 3.6 percent between 2013 and 2018, according to NIC. The number of seniors households will grow even faster in Austin; Charleston, S.C.; and Raleigh, N.C.
“A lot of developers have come to chase those emerging markets,” says Aron Will, senior vice president of debt and structured finance for CBRE Capital Markets-Seniors Housing, who works out of the company’s Houston office.
To help them hunt for sites, developers make a list of the places with the highest demand. “We analyze every zip code in the state and rank them all. That allows us to seize opportunities,” says Zeke Turner, founder and CEO of Mainstreet, a developer of short-stay rehabilitation and long-term care properties, headquartered in Carmel, Ind.
Developers also pay attention to home values. It helps if a large number of potential residents have paid off the mortgages on their homes, or at the very least do not owe more on mortgages than their homes are currently worth.
Adult children of prospective senior residents are also a clue to where demand might be high for seniors housing. That’s because seniors often move into properties near their adult children, who are often in their mid-50s.
These adult children are often influential in choosing a place to live for their aging parents. Some developers weigh the number of children of prospective residents more heavily in their market study calculations than the actual number of seniors living nearby.
“Our emphasis is on that 55-year-old adult daughter,” says Mark Spiegel, president of Formation. “I would much rather be in a market with a lot of affluent adult children than a lot of seniors.”
Many elderly people move into seniors housing located in the same areas where their grown-up children have lived for the past 10 to 15 years.
That’s bringing ground-up development for seniors housing to places that were top markets for single-family housing a decade or so ago — places like affluent suburbs in Texas and Florida.
Follow the commuters
Seniors housing developers find promising sites for seniors housing in areas that adult children drive past on a regular basis on their way to work or to run errands.
“That adult daughter is going to go to a place that she has seen on her drive path,” says Spiegel. “Where does she drive?”
Developers look for sites on well-traveled roads not far from affluent residential areas and near frequently visited places such as grocery stores, churches or synagogues.
But the road can’t be so busy that it doesn’t seem like a pleasant place for an old person to live. “You don’t want to be on a freeway,” says Spiegel. “It has to look grandmotherly.”
The most desirable sites for seniors and their families are in lively neighborhoods, within walking distance of services like medical offices or retail shops.
“Walkability is a big, big factor,” says Susan Brecht, president of Brecht Associates, a seniors housing consultant based in Pine Beach, N.J. The adult children of seniors always want to feel that their parents will be living in a pleasant, lively area.
“Contrary to what people believe, seniors want to be in the thick of things,” says CBRE’s Will.
The high price of land
Seniors housing developers often have a difficult time winning the bidding war for desirable infill sites when they compete against developers of other property types who can build projects with a higher density.
“Office or retail developers can outbid seniors developers for an infill site,” says Bruce Gibson, principal of Senior Capital Advisors, a brokerage firm based in North Miami, Fla. Condominium developers have also resurfaced and are bidding high for available land to build mid-rise and high-rise buildings.
That’s pushed seniors development out of many prime downtown locations in markets like South Florida, even though demand for seniors housing remains strong there.
“Most seniors housing operators would be hard-pressed to put something in downtown Boca Raton,” says Gibson. “And in Miami-Dade County, the land is so expensive there are very few if any new facilities.”
Older, more densely developed metro areas can also be difficult places to find a site on which to build — even if the demand for seniors housing is strong. In New York, Chicago and Boston, seniors housing now under construction will increase the inventory of seniors housing by less than 5 percent, according to NIC.
“A lot of the new development has been in secondary and tertiary markets as opposed to some of the major metros,” says Gibson.
However, it can be a mistake to build seniors housing too far away from the bustling kinds of neighborhoods where seniors most want to be, even though sellers sometimes market inadequate sites for seniors housing at attractive prices.
“Anyone who doesn’t know what to do with a site thinks it’s good for seniors,” says Mainstreet’s Turner.
A seniors housing property built in a bad location will be very difficult to transform into another use. “If you’re building purpose-built seniors housing, then that’s what it’s going to be,” says CBRE’s Will.
Some seniors housing developers have been able to win the right to build on prime infill sites near new lifestyle centers in affluent inner-ring suburbs. “A good site might be alongside a nicely done shopping center,” says Formation’s Spiegel.
That type of site might be highly sought after by an apartment developer. Local officials are sometimes more willing to grant a zoning variance to a seniors housing developer than an apartment builder.
Gaining input is crucial
Smart developers and their consultants also contact experts such as local real estate agents, planning officials, financial advisors and even clergy. This cross-section of professionals can help a developer understand which seniors might be interested in moving to a particular site.
“Don’t draw a circle around a site,” says Brecht. “You have to ask local people where we will draw from and where we won’t draw from.”
Smart developers often visit the area surrounding a potential seniors housing site in order to assess the competitive landscape today and in the future.
Developers and consultants like Brecht also double-check the assumptions in the market study. It’s important to make sure these expectations match reality.
Developers should check the rents they hope to achieve against the rents earned by comparable existing developments and the income of local potential residents.
Developers should also make sure that the local labor market can provide a pool of potential employees to help operate the property. If employees will likely be driving a vehicle to work, the payroll expenses will need to recognize the high cost of gas.