Niche properties

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.

Independent Living

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.

Assisted Living

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.”

Roxanna Guilford-Blake

Roxanna Guilford-Blake is a free-lance writer based in Decatur, Ga. Affordable Seniors Housing Although development of affordable seniors housing is increasing, simply not enough exists nationwide. Unsurprisingly, most of the affordable seniors-housing options are those offering the fewest amenities and services — seniors apartments. About half of these are classified as affordable because they participate in various tax credit programs, according to Seniors Housing Finance: Trends & Prospects, an American Seniors Housing Association report. Cooperatives offer an affordable option for independent seniors, according to Douglas M. Kleine, executive director of the National Association of Housing Cooperatives. And the projects can be easier for developers. “What helps make co-ops more affordable is that there is a single mortgage, rather than 100 different ones, and the purchase of shares in a co-op is a personal property transaction like buying a car in most states,” he explains. “Local governments may kick in some money or land in return for a promise built into the co-op\'s bylaws to keep the co-op shares affordable.” However, the bulk of new development markets to higher-income seniors, says Robert M. Stone, CCIM, a senior vice president in the senior-housing and multifamily divisions of the Henry S. Miller Commercial Co. in Dallas. Given the additional operating costs involved in most areas of seniors housing, “it requires a subsidy to build a product that meets the needs and is affordable,” he says. Religious and other nonprofit groups are leading the development effort, observes David W. Stolte, director of the senior- and affordable-housing divisions of the Charles Dunn Co. in Irvine, Calif. They are encouraged by low-income financing incentives strictly for nonprofit organizations, says David B. Dill, CCIM, CPM, president of Cascadia Pacific Developments in Vancouver, British Columbia. For example, the Department of Housing and Urban Development\'s Section 202 program for affordable seniors housing is available only to 501(c)(3) nonprofits. Low-income housing tax credit programs are available, but they can be challenging. Seniors-only apartment projects have to compete with family projects for the same credit allocation, and although the credits offset federal income taxes, the programs are managed by the states, Stone warns. “There is not much consistency from state-to-state as to which types of projects get funded.” Similarly, local governments may offer various incentives to encourage affordable CCRCs, according to ASHA. Government-sponsored enterprises such as the Federal National Mortgage Association and the Federal Home Mortgage Corp. remain promising capital sources. And new loan programs may make it easier for seniors to afford market-rate and higher-cost housing. For example, Grannie Mae, a non-government-sponsored loan program, entered the market at the end of 2002. It uses a reverse-mortgage concept with an unsecured line of credit to help close the gap between a resident\'s income and the cost, according to Stone. After debuting in Virginia and Maryland, the program will expand to other states, he says. Assisted LivingThere\'s an acute need for affordable options in the assisted-living sector, as many people can\'t afford the steep monthly fees of these facilities, but need the extra care. One approach to affordable assisted living is using programs not specific to assisted living. For instance, Section 42 low-income housing credits can cut the cost of the apartment-rental portion of an assisted- living community, says Len P. Deering, CCIM, of GMAC Commercial Mortgage in Chicago. “Add in many other sources of money, such as HOME funds and grants, and even more people can qualify due to the reduced rental costs,” he says. Some developers have used HUD\'s Section 232 full-insurance Multifamily Accelerated Processing to help gain financing for assisted-living facilities, according to ASHA. Tax-exempt bond financing may be an option where there\'s clear need, but given problems in the assisted-living sector, “bond rating agencies and bond-fund managers predictably continue to struggle with pricing and other issues,” according to ASHA. Some states now allow Medicaid to be used in conjunction with assisted living. This allows seniors with little money to receive limited care without entering a full-scale nursing home, which could be twice as expensive, Deering says. Sources of Funding • The Fair Housing Administration provides fixed-rate loans for construction that transition into long-term financing. “The loan is non-recourse for the construction phase and permanent term of the loan,” explains Len P. Deering, CCIM, of GMAC Commercial Mortgage in Chicago. • The Federal National Mortgage Association and the Federal Home Mortgage Corp. are the best lending options for seniors apartments and assisted-living properties that have an independent- living component, Deering says. Their interest rates and terms are the best in the market for stabilized and seasoned properties. However, Fannie Mae and Freddie Mac provide construction- forward programs for seniors apartments, but not other forms of seniors housing. • The Department of Housing and Urban Development still is financing free-standing assisted- living developments under the HUD Section 232 program, but it\'s hard to jump through the hoops, says Robert M. Stone, CCIM, a senior vice president in the senior-housing and multifamily divisions of the Henry S. Miller Commercial Co. in Dallas. “During the past 12 to 18 months the project qualification parameters have become more difficult for developers to meet because of HUD\'s interpretation of market study and appraisal assumptions,” he says. • Securitized financing has dried up, except for independent-living facilities and seniors apartments. However, real estate investment trusts still will do sale-leaseback and sale-manage-back transactions with existing clients that have proven operational experience, according to Stone. • Some local banks provide financing for various seniors-housing segments, whether the properties are stabilized or new construction, Deering reports. These loans normally require personal guarantees by the owners and generally are short-term loans in the three-to-seven-year range. • “Bank financing and bridge loan sources provide the best acquisition financing alternatives in today\'s market for most seniors-housing property types,” Stone adds. • “Wall Street conduits have little interest in seniors housing beyond seniors apartments,” Deering notes. “The rest of the seniors-housing segments have too much of a business-income component for their lending requirements.” University of Minnesota, Environmental Health and Safety Indoor Fungi Washington State Department of Health, “Is Indoor Mold Contamination a Threat to Health?”  


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