For the past 17 years, the senior living industry has been waiting for the proverbial “other shoe to drop” since the grand mal financial meltdown that threatened the very existence of the sector. During that time at the turn of the millennium, a flood of dollars from overeager investors created a serious oversaturation from which some thought no recovery was possible.
Fortunately, cooler heads prevailed in the ensuing years and though the financial crisis of 2008-09 threatened to be the dreaded “other shoe,” senior living managed to escape any lasting damage due to a tempering of over-exuberance that permeated residential real estate. Thus, the wait continues.
Although there currently are no overt signs of another negative financial situation occurring, some in the industry are concerned about possible triggers, such as the acuity shift throughout the sector, undisciplined expenditures of capital and supply-demand imbalances in some markets. At this point, though, senior living operators should find a sense of relative normalcy when approaching the financing community.
“There are signs of saturation in particular markets, but of the projects we have financed that are in lease-up, the vast majority are on or ahead of projections,” says Evelyn Lee, senior vice president of SunTrust’s Aging Services practice. “As it relates to the pipeline of projects, we see our operating clients continuing to be disciplined around where they deploy their time and capital. We have quite a few long-tenured, experienced clients who are sitting on the sidelines today with the expectation that there will be opportunities to rescue projects at attractive prices in the coming years. That patience is also being driven in part by rising construction costs.”
Anthony Luzzi, president of Sims Mortgage Funding, says seniors housing capital through the Department of Housing and Urban Development prolific LEAN mortgage insurance program continues unabated and that it remains a stronghold for dependable lending.
“Interest rates for HUD-insured loans remain favorable, and LEAN loan processing continues to be efficient, leading to timely and predictable outcomes,” he says. “The majority of HUD activity in the seniors housing space is under the Section 232/223(f) program, which covers existing properties. However, it is possible to use HUD for financing the construction of new developments. Using HUD for that option requires a strong developer and operator, a strong market and related demographics, a conservative underwriting profile and a relatively long lead time.”
Supply for senior housing has continued to grow due to the infusion of both foreign and domestic institutional equity into senior housing investments, and data from the National Investment Center for Seniors Housing & Care shows that inventory has been exceeding absorption for the past several years, notes Scott D. Frederick, vice president of asset management at Capital Health Group.
“Anecdotally, the majority of the overbuilding is occurring in markets with low barriers to entry,” he says. “However, there are still opportunities in high barrier to entry markets. This growth will continue, provided that the capital markets continue to invest into senior housing.”
An imbalance does exist with supply outstripping occupancy rates, Frederick says, and only a decline in capital inflow can move the market back toward an equilibrium.
Kristen Ahrens, managing director at Capital One Healthcare, acknowledges that concern about overbuilding in certain markets is real, but she says that the pace of new development overall seems to have slowed lately.
“As with any real estate type, the hope would be that supply and demand for seniors housing would find equilibrium based on information from the market,” she says. “While there is still a long way to go, information on occupancy, absorption and new construction is now more readily available in our space than ever before.”
MANAGING ACUITY CREEP
To ascertain whether trouble is brewing and how it could manifest itself one needs to look at what’s driving the market, says David Friend, M.D., managing director and chief transformation officer for BDO Boston. If one culprit can be identified, it might be the acuity shift throughout the post-acute care continuum.
“The assisted living community of today is yesterday’s nursing home,” he says. “Is assisted living equipped to provide the kind of care that their residents need? And what happens when these residents need even more care? Assisted living communities are becoming a part of the medical establishment, whether they are ready or not.”
Comparing assisted living demographics between 2000 and 2017 is like night and day, Friend says. New construction projects need to be in tune with what the residents of today demand and avoid looking like “cookie-cutter, boxy buildings,” Friend says, “because that is the wrong kind of product.”
To be sure, as residents come to independent and assisted living communities at a more advanced age, operators of these properties need to make arrangements to provide more care, Frederick agrees.
“For example, this can be in the form of providing direct access to home healthcare or making preparations for companion care in independent living, while assisted living operators will continue to increase their level of care,” he says. “We also expect, as baby boomers enter the market, the senior housing paradigm will have to change and offer more services and amenities.”
On the financing side, investors are generally more cognizant of the acuity creep and that investor interest in settings with multiple levels of acuity generally outweighs single-acuity communities, says Jeff Binder, principal and managing director for Senior Living Investment Brokerage.
“If a community consists of just one level of care, the typical investor wants to know what opportunities exist to add additional levels of acuity and ancillary services, and to increase length of stay,” Binder says. “It is no secret that the average age of residents in seniors housing has increased, and with this brings higher care needs. That facet distinguishes this sector from other types of real estate that investors may find more comfortable.”
THE ‘IDEAL’ INVESTMENT
Market concerns aside, senior living operators have access to capital from various sources if they meet the criteria investors have set.
“We like to partner with experienced and proven operators, because it is ultimately the operations that drive the value of the real estate,” Lee says. “We also like to work with clients who have several or more properties because they benefit from a more diverse cash flow stream.”
Binder says his firm looks for two primary factors: location and operating partner.
“Both of these play into the type-acuity-size of the project, as they are dependent on the location market and the operator’s track record with that type of project,” he says. “There is a direct correlation in the seniors housing sector between the distressed, newly developed communities we see, the lack of experience of the operator and the poorly selected site for the project.”
Tim Cobb, managing director for senior housing and healthcare at Berkadia, says assisted living is gradually being seen as more of a real estate option, which indicates a progressive change in how potential projects are assessed.
“As this perspective continues to shift, the industry will see more capital along with better risk management and enhanced innovative thinking,” he says.
Cobb maintains that it is imperative for operators and developers to focus on increasing their market penetration, focusing on innovation and design while finding a way to lower costs for a majority of the population. Technology — so far vastly underutilized in senior living — is one way for operators to make themselves more desirable, he says.
“One thing that remains constant throughout this evolution is an investor’s desire for strong financial, risk and process management,” Cobb says. “As such, an area that should be watched closely is the role of technology. With the ability to speed information and mitigate risk brought on by legislative changes, technological advancements will be a key factor in an investor’s decision-making process.”