Seniors Housing Developers Find Big Opportunities in Small Markets
The high-profile cities that line both coasts aren’t the only places where the development of new seniors housing product is proving to be a smart investment.
Less populated areas are also welcoming new communities that are designed and operated just like those facilities opening in popular urban markets.
But seizing opportunities in smaller markets is a different ballgame than it is in high-density areas. A smaller list of prospects and a shorter supply of qualified talent are among the drawbacks.
Still, many owners find that the pros outweigh the cons. They cite pent-up demand for newer, more modern product, lower land costs, quicker permitting and faster lease-ups among the perks of a small market. And these less populous areas are gaining in popularity among many investors.
The National Investment Center for Seniors Housing & Care (NIC) tracks 31 markets that make up the largest metropolitan areas in the United States. It also tracks 68 secondary markets.
NIC defines a secondary market the same way the U.S. Office of Management and Budget (OMB) does. The OMB divides smaller economic areas into core-based statistical areas (CBSAs), each of which consists of a county or counties that share an urbanized area of at least 10,000 residents.
According to NIC’s Chief Economist Beth Burnham Mace, inventory is growing in these secondary markets, and that trend is expected to continue.
“The data show that there wasn’t much inventory growth initially in the years following the recession in the secondary markets,” says Mace. “But as the economic cycle matured, investors and developers started going to the secondary markets more than they did when the economic recovery first began.”
According to Joe Jasmon, CEO of Shepherd Senior Living, a seniors housing community in a small town is likely to be smaller than a community in a big city, but internal rates of return are the same. “Profitability at times is even better in the smaller markets to scale because land costs are less,” he says. “Overall, there are more opportunities in the smaller markets because there are so many across the country.”
What’s the secret to making seniors business work in outlying markets? Most operators say relationships are key.
While large operators are present in secondary markets, it’s the smaller, regional operators who, by design, can experience greater success because of their nimbleness, reduced bureaucracy and high-touch approach that tends to strike a chord with smaller-market populations.
“I think there is a consumer weariness in smaller communities,” says Greg Joyce, president and CEO of Legacy Retirement Communities. Legacy owns three communities in Lincoln, Nebraska, where Joyce’s grandfather founded the company in 1995 as a response to a short supply of quality retirement communities in the region.
Legacy owns and operates four seniors housing communities comprised of 453 units of independent living, 134 units of assisted living and 32 memory care units for a total of 619 units. The company employs approximately 400 people.
“In communities like Lincoln, we refer to it as the ‘Walmart effect,’” he says. “I know this city in particular is very leery of large corporations because they tend to feel that they may not care about their community in the same way the mom-and-pop shop down the street cares.”
Murfreesboro, Tennessee-based National Health Investors (NHI) owns 215 properties in 32 states and targets acquisitions in healthy secondary or tertiary markets.
The REIT typically partners with an operator under a variety of potential scenarios, such as sale-leasebacks. Forty-one percent of NHI’s operating partners are small or regional operators.
Kevin Pascoe, chief investment officer for NHI, says the company’s strategy is to acquire communities in small markets at a favorable price that provides solid returns for NHI shareholders, while also allowing operators to cover the lease payment with some cushion left over.
NHI’s approach allows operators to benefit from a cash flow stream that helps build their business and invest in the community.
“NHI’s interest in a market, whether large or small, is as much about the operator as it is the size of the market,” says Pascoe. “What we really like about smaller and regional operators is that they have a unique opportunity to know their residents. When residents see the actual owners and executives in the buildings and interacting with residents, staff and families, it helps deepen those relationships, and I think it really helps to build a brand within those communities.”
Miami Beach, Florida-based Shepherd Health, launched in 2015, primarily focuses on new development and has eight properties in its pipeline. The company also owns CountrySide Lakes in Port Orange, Florida. The company’s recipe for success in small markets is community engagement from day one.
Shepherd is currently underway on construction projects in the Southeast. Shepherd Living at The Range is a 124-bed assisted living and memory care community in Madison, Alabama, that will open this fall. Shepherd Living at Savannah Quarters, in Pooler, Georgia, will open in spring 2018 to serve 82 assisted living residents and 42 memory care residents.
Jasmon says the company prefers to do business in smaller communities because there is less competition and more of a welcoming environment from local government, businesses and residents.
“From the moment we’ve identified and secured the land, we begin to become part of the community,” emphasizes Jasmon. “Whether you own a gift shop or a gas station, we get to know our neighbors, so that by the time we open our doors we know every person within a five-mile radius.”
Jasmon says that Shepherd’s approach leans on strong communication to explain the project with the understanding that smaller communities tend to have more of an emotional investment in a ground-up development.
“In smaller markets, people are more open and welcoming when you walk in the door,” emphasizes Jasmon. “In bigger cities, people are not as open to having that conversation, or they think you’re just trying to sell them something.”
Shepherd’s development prototype is a one-story facility designed to encourage engagement among residents and to ensure the property is attractive and welcoming to the surrounding community.
Jasmon says that getting to know one’s neighbors is an important piece of Shepherd’s business model not only because it speaks to a smaller community’s peace of mind, but also because it affords an authentic kind of marketing and brand development.
“We find that we can quickly get referrals and recommendations faster than in a larger market, even though the population is smaller,” he says. “When people are talking about our project, we know we’ve done right in the community. You can’t buy that kind of marketing. You have to earn it.”
Shepherd’s resident puppy provides another kind of marketing and service-enhancement “amenity” that can’t be bought. Each community has its own live-in dog to bring that extra little bit of happiness, hominess and healing into residents’ daily lives.
Bella the golden retriever moved into CountrySide Lakes in April. In the new developments, the resident pup will have his or her own room.
Evolution of an operator
Legacy Retirement Communities has been building and growing its brand locally in Lincoln, Nebraska, since it was founded in 1995, a time when local supply of seniors housing was so low and demand so high that the owners’ mindset of “if you build it, they will come” might seem complacent by today’s standards.
Most amenities and services were outsourced at first, CEO Joyce says, but Legacy’s leaders found that in practice the difficulty of getting numerous parties to agree on major decisions was compromising the quality of life and care.
“In a nutshell, we began life as developers but ultimately found ourselves more passionate about operations,” says Joyce.
“That was a hard lesson, but it’s something we’ve become very passionate about. We’ve really built our success around that area of our business and around networking in our industry within the region to enhance what we do.”
Joyce says bringing all levels of operations in-house was a pivotal point in the company’s development because it propelled management to fine-tune its customer approach to become more relationship-oriented, a move that directly resulted in guiding Legacy through some dips in occupancy.
“When you just build buildings to fill them up, how passionate can you be?” asks Joyce. “We used to market our facilities by just being order takers. If you said your grandmother was looking to make a move, I would rattle off what we had available. But we are a lot more person-oriented now. The less we talk about ourselves, the better we can understand how we can be valuable to other people. Today, we listen more than we talk.”
These types of relationship-centered marketing and management strategies have led to Legacy maintaining an occupancy rate of 99.5 percent for the past five years, a figure well above the occupancy averages of secondary markets tracked by NIC.
The occupancy rate of the 68 secondary markets NIC tracks was 88.8 percent at the end of the first quarter of 2017, compared with 89.3 percent for primary markets.
Joyce says that consolidating management practices, engaging the surrounding community and emphasizing a relationship-centered approach are the pillars of success.
Without much burdensome bureaucracy, Legacy enjoys the ability to adapt and evolve quickly, an advantage that larger operators don’t always have. A recent complaint voiced by a resident who was confused by how Legacy’s accounting program itemized charges, for example, was resolved quickly and with lasting effects.
“I walked across the hall to my CFO’s office and we were able to call back the same day with solutions,” says Joyce. “This snowballed into an overhaul of some of our accounting procedures because as we peeled back the onion, we found this was a frustration for a lot of people. The point is that this resident didn’t have to dial an 800 number and get bounced around. He called our home office, which is three miles from his community, and spoke to me directly. We were able to resolve his frustration within an hour,” adds Joyce.
Every business operation has its set of advantages, points out Joyce. “Ours is that we are small and we are nimble. You have to be engaged, and you have to be a valuable resource in your community.”
— Lynn Peisner