Editor’s Note: This article appears in our 2019 Dealmaker’s Handbook. The full publication may be downloaded here.
Entrepreneurs and investor groups understandably are nervous about a large group of middle income-level older adults who will be eyeing their living options over the coming decade.
The harsh realities, enumerated in painful detail by a recent study funded by the National Investment Center for Seniors Housing & Care, paint a grim picture of a demographic with dwindling financial options to pay for alternatives to aging in place.
The gist of the mammoth challenge ahead is this: In less than 10 years, more than half of the 14.4 million middle income older adults will lack the financial wherewithal to pay for senior housing and care.
But if early efforts are any indication, a few industrious developers are finding success making the non-skilled market an affordable choice for cash-strapped retirees.
Getting the requisite number of “heads in the beds,” however, is going to require multiplying those efforts on a grand scale — on both private and public sector fronts.
To ensure this coveted middle market continues to thrive, investors will need to lower their expectations of returns, said David Grabowski, Ph.D., a professor of healthcare policy in the Department of Health Care Policy at Harvard Medical School, and an author of the NIC-funded study.
Grabowski believes many good ideas are now on the table, including charging less expensive rents, lowering profit margins, developing mixed-income communities (in which higher-paying residents subsidize costs for lower-income residents) and offering more basic and less expensive housing service products.
Still, there is a limit to how much profit those investors are willing to forego, according to Steve Kennedy, senior managing director of Lancaster Pollard. “Financial stakeholders require an acceptable rate of return,” he said.
Other factors can make conditions palatable.
“While middle market projects will typically not offer the opportunity for a home run, they can provide more dependable market returns due to the high occupancy of such facilities,” Kennedy noted. “Additionally, the relatively quick fill up to stabilization can generate additional return on equity.”
Grabowski said other efforts can go far toward ensuring a reasonable investor return. These include technology solutions “to reduce operating costs, increase staff efficiency or make residents more self-sufficient,” as well as à la carte pricing models that break out service and care expenses from housing.
Finding cheaper ways to build senior housing also is a goal.
“Construction costs need to be controlled, the operator should ideally be proven in the middle market space and the cost of debt capital should be as low as possible,” Kennedy said. “This latter characteristic makes FHA / HUD financing — long-term, low fixed rate and non-recourse — appealing, whether for new construction funding or take out of private sector funding.”
Several positives are working in favor of these efforts, Kennedy said, including the low cost of debt capital, surplus of cash seeking yield and the private-public partnership opportunities available via tax-credits and agency financing.
Government could play a significant supporting role.
Grabowski proposed offering tax incentives for builders and operators of senior housing to serve middle-income seniors, an option Kennedy said already is being used successfully in Illinois’ Supportive Living Program, which offers a Medicaid waiver for the construction of assisted living facilities.