A Maturing Market
Seniors Housing Struggles to Find Balance Before the Boom.
By 2030, an estimated 20 percent of Americans will be older than 65 years of age. Accordingly, the long-term prospects in seniors housing look more promising as the baby boom generation retires, presenting developers with a unique set of opportunities — and challenges.
In many ways, success in seniors housing boils down to identifying “pockets of opportunity,” says Margaret A. Wylde, president and chief executive officer of the ProMatura Group, an Oxford, Miss.-based organization that researches seniors-housing issues. Opportunities exist in areas with market and job growth, low unemployment, and where the number of people age 45 to 65 is increasing — provided the area has a healthy economy and isn't overbuilt. The middle- and moderate-income markets are ripe for seniors-housing developers “who can learn to put together reasonable packages,” Wylde says. (See “Affordable Seniors Housing” sidebar.)
However, the current seniors-housing market is stagnant. In 2000, the 65-and-older population grew more slowly than the total population for the first time in the history of the U.S. Census. Seniors-housing construction decreased markedly last year, according to the American Seniors Housing Association's Seniors Housing Construction Report, 2002. (See chart.) Also, troubles in the assisted-living sector have made lenders generally wary of financing any type of seniors housing. But that may change as the first wave of baby boomers turns 65 in 2011 and demand for retirement housing begins to grow.
Seniors-Housing BreakdownAchieving success in the industry requires developers to have a thorough understanding of its distinctive sectors. Seniors housing encompasses a range of property types that are divided into three general categories: independent living, assisted living, and continuing care communities.
About half of the current seniors-housing developments nationwide are considered independent-living facilities, according to ASHA. With high occupancy rates — above 90 percent — few of these properties are coming on the market, says Robert M. Stone, CCIM, a senior vice president in the senior-housing and multifamily divisions of Henry S. Miller Commercial Co. in Dallas.
Independent living comprises two basic segments: seniors apartments and independent-living communities. Seniors apartments are age-restricted multifamily units that generally offer the same amenities as all-age apartment communities and may provide limited senior-specific amenities, such as transportation for residents. Historically they are financially stable with “negligible” distress, and resident turnover is between 10 percent and 20 percent, according to ASHA's report, Seniors Housing Finance: Trends & Prospects.
Independent-living communities also cater to healthy active seniors but provide more senior-related amenities, activities, and services such as meals, linen service, and light housekeeping. A few are multigenerational, such as Pelican Point, near Baton Rouge, La., a master-planned community with an age-restricted component, Wylde says. Turnover in independent-living communities is around 39 percent, according to ASHA. Most of the sector's growth has come through conventionally financed developments by private owners/operators.
Designed for seniors who need help with daily tasks, assisted-living facilities provide housing, meals, personal care, and social activities. Unlike nursing homes — which are not considered seniors housing — assisted-living facilities do not provide continuous, round-the-clock care. Free-standing units for seniors with Alzheimer's disease fall into this category. Turnover is about 50 percent.
Overbuilding has kept assisted-living occupancy well below market levels, according to ASHA. But there's some good news: In second-quarter 2002, average assisted-living occupancy rates edged up to 84.5 percent from 84 percent in the first quarter, according to the National Investment Center for the Seniors Housing and Care Industries.
Most of the seniors-housing challenges have been in the assisted-living sector, but they aren't just a result of overbuilding, says David S. Schless, ASHA president. “The assisted-living industry has seen some very significant increases in operating expenses — labor and liability insurance are two of the biggest,” he says.
Continuing Care Retirement Communities
CCRCs provide a full continuum of care, from independent living to skilled-nursing care, on one campus. They have an average occupancy rate of 90 percent or better. Most require entrance fees and can include a variety of ownership models. Residents generally move in as independent-living residents, transfer to assisted living when necessary, and eventually enter the skilled-nursing component. That complexity might make financing more difficult, according to ASHA.
Planning for the “Me” GenerationWhen it comes to new development, baby boomers are changing the face of seniors housing: Facilities that were adequate a decade earlier may not interest the next generation of seniors. They may find the “shoebox” facilities of the 1980s and 1990s obsolete, says Joyce Polhamus, an architect with the SmithGroup in San Francisco. She has designed several seniors communities around the world, including the assisted-living component of the Motion Picture and Television Fund's seniors community in Woodland Hills, Calif.
Gradually developers are hiring designers to create communities for this emerging market. “Variety is going to be the name of the game,” Polhamus says. But it's more than making the boxes different or dressing them up, she adds. Boomers have no desire to move into institutions. “It needs to be more like a home, not home-like,” Polhamus says.
To be successful, developers need to “create environments where residents have a sense of belonging and realize it is a better quality of life [than they could have had in their own homes],” Wylde agrees.
C Is for CommunityCCRCs may be where this community-environment trend is best realized. In fact, facility isn't even used to describe CCRCs, says Carole Moore, director of marketing at Bishop Gadsden Retirement Community in Charleston, S.C. “The industry standard is to reinforce the community aspect of a CCRC and use the term community always,” she says.
Regardless of the property type, the goal is to create spaces where residents feel at home in the entire building, not just in their units, Polhamus explains. Homey trends such as wide stairways and fireplaces and a move from large generic activity rooms to smaller conversation areas are popular, says David W. Stolte, director of the senior- and affordable-housing divisions of the Charles Dunn Co. in Irvine, Calif. At the Motion Picture and Television Fund community, 40 percent of the living area is devoted to common rooms, but they are residential in scale, Polhamus says.
Amenities GaloreSeniors locating in CCRCs want to continue or enhance their present, often youthful, lifestyles. This trend drives what and how CCRCs market to potential residents. “CCRCs will have all the amenities,” Stone predicts.
“Industry-wide trends … support the lifestyle these residents sought when they made the decision to move to a CCRC,” Moore agrees.
Fitness and wellness amenities are popular across all property types. Outdoor spaces, such as hiking trails, paths, fountains, and putting greens, are important, as well as indoor facilities such as pools and exercise and weight-training rooms. Low-impact aerobic classes, yoga, and tai chi are popular, as are aquatic programs, Moore and Polhamus both note.
Small-scale movie theaters, complete with stadium seating and concessions, are another interesting CCRC amenity gaining popularity, Stone reports.
Food service is becoming a significant point of competition and for good reason: Wylde's research indicates that across all property types, food service is the area with the most dissatisfaction.
Again, it's all about variety, Polhamus says. Out of necessity, communities have started offering more vegetarian and vegan selections. Free-standing bistros, ice cream parlors, and coffee shops reflect this growing trend, as does the replacement of communal dining rooms with a variety of dining locales.
Location, Location, LocationOf course, amenities are only half of the picture; to be successful, seniors-housing developments must locate where seniors want to live.
Since 1997, California has experienced the most seniors-housing development, followed by Texas and Florida, according to ASHA. However, it's clear that warm weather isn't the only draw for seniors. In fact, there's increasing demand for seniors projects in the North, says David B. Dill, CCIM, CPM, president of Cascadia Pacific Developments in Vancouver, British Columbia.
Seniors often choose locales near their families. This decision — like the choice of the community itself — depends on what feels like home. People from large cities, particularly in the Northeast, who lived in high-density areas will seek out high-density projects, Stone says.
“I don't think there's any real geographic trend,” Schless says. He has observed that few metropolitan areas suffer from overbuilding. “This is unscientific, but many of the more challenging problems are in secondary and tertiary markets.”
Finding FinancingDespite the potential demand for seniors housing, capital remains tight.
“Financing is still very limited,” says Schless. “Lenders … have become very selective in the types of projects they are financing on the construction side.”
Driving this capital flight, in large part, is lender reaction to recent overbuilding in the assisted-living sector. Also, many financing sources consider the entire seniors-housing industry distressed. And though many lenders are sophisticated enough to distinguish between the different sectors, funding sources remain relatively dry.
While most are willing to lend on age-restricted apartments — the most similar to traditional apartments — the money supply dwindles as the services offered increase, says Len P. Deering, CCIM, of GMAC Commercial Mortgage in Chicago. As the service level rises, “the property is more dependent on income generated by an operating business rather than real estate, and therefore more risk is inherent in the operation of the property,” he says. “It becomes more of a business loan and less of a real estate loan, with age-restricted apartments being the least risky.”
Ironically, CCRCs are among the most difficult seniors-housing deals to finance, Deering says. “This may be a logical concept for the senior, but there are very few lenders that are comfortable with lending on the entire continuum-of-care property, either from lack of expertise regarding one of the segments or their concern regarding the risk of a particular segment.”
CCRC developers may need to structure the various continuum segments as individual operating companies, with different lenders brought in on one or more segments of the overall project, he explains.
“Those achieving financing are firms with strong balance sheets and a track record of success in the industry,” Dill says. They also must demonstrate sufficient market demand. “This does not mean just knowing there [are] seniors in the 75-plus age group with annual incomes of $25,000 or greater, but actually determining how many are in the market for the product. It is based on supporting demographics and market feasibility fundamentals that support the proposed seniors-housing type,” he says. (For more information on financing, see “Sources of Funding” sidebar.)
Overcoming the RisksWhile the seniors-housing industry is improving, its short-term outlook still is risky. But if developers can overcome the biggest risk — lease-up — the path becomes smoother, Stone says. “If a project fills and stabilizes within the projected time frame, it should be an excellent long-term investment because of the growth in the elderly population for the foreseeable future.”
Also, bargains abound: “Investors with operating expertise on their team are finding excellent investment opportunities to buy existing seniors-housing buildings at below replacement costs,” Stone adds. In fact, some opportunistic buyers have purchased distressed properties at a discount, with assisted living accounting for 90 percent of all distressed seniors-housing property sales, according to ASHA.
“The risks are countered with operational expertise and an understanding of the dynamics within a given submarket,” Stone says. “The rewards include the satisfaction of providing housing meeting or exceeding the expectations of the older generations.”