Seniors Housing Development Costs Dictate Market Entry, Says InterFace Panel

by Kristin Harlow

ATLANTA — The pace of seniors housing development has accelerated sharply in recent years. Approximately 396 seniors housing properties came online or opened in the top 100 metro areas in the country from the fourth quarter of 2016 to the fourth quarter of 2017, according to data from Plante Moran Living Forward, a senior living development consulting firm. During the two years prior, about 596 communities opened.

What’s more, approximately 65 percent of those newly added properties were from operators that only had two or fewer properties, according to Dana Wollschlager, practice leader for the firm and moderator of the development panel at the 2018 InterFace Seniors Housing Southeast conference.

The significant number of developments and new entrants to the seniors housing space were major discussion points for the panel, which took place on Wednesday, Aug. 29 at the Westin Buckhead in Atlanta. The one-day conference drew nearly 520 developers, lenders, investors and operators in the senior living space.

Joining Wollschlager on the panel were Richard Ackerman, managing partner of Big Rock Partners; Jeff Arnold, chief operating officer of United Group of Cos.; Blanding Beatty, chief investment officer of Traditions Senior Living; Andy Isakson, managing partner of Isakson Living; and Jimmy Taylor Jr., chief investment officer of Omega Communities.

Beyond heightened demand for seniors housing properties as the population ages, another factor triggering development is that existing product is dated. But the challenge the industry faces, and often neglects, is affordability and inability to enter middle markets.

“The bulk of the nation can’t afford what we’re selling,” said Ackerman. “The reason we have such a low penetration rate isn’t just because [product] is old and outdated, it’s because people can’t afford it. That’s a big piece we don’t talk about.”

Beyond the real estate costs, there are still food, labor and medical costs feeding the bill for seniors. Ackerman said that without government support, it would be hard to ever enter the middle-income markets, particularly for assisted living.

In metro Atlanta, the average monthly rent for assisted living properties is $4,308, according to the National Investment Center for Seniors Housing & Care.

Isakson echoed a similar sentiment, saying he knows it’s a problem. “It costs the same to take care of a wealthy person as it does a person of meager means,” he said. “It’s labor intensive.”

Cost of building

In today’s market, developers are faced with heightened construction costs.

“We’ve seen slight increases in steel [prices], which dictates the inability to go to the middle market,” said Taylor.

It’s becoming increasingly difficult for developers to make the math work, according to Beatty. “I think we’re going to see a substantial decline in new construction,” he said.

One way developers are attempting to mitigate risk and anticipate cost escalations is by being as flexible as possible when it comes to a property’s design. The intention is that the property can migrate from independent living to assisted living and memory care when needed.

Beatty said his firm is even taking notes from the student housing space and looking more at shared suites.

“Affordability is one of the biggest challenges from a macro perspective for the entire industry,” he said. “When you have a smaller footprint for each individual room, that’s how you can look at a lower price point.”

Developing for the ages

Arnold said that having a “Plan A, B and C” is the single most significant change to the development process today in terms of managing and mitigating risk.

United Group of Cos. has two different product types. One is referred to as “independent light,” where the average resident is 80 years old. The other is an age-restricted product. The significantly lower price point lures residents around age 72.

Some features that the younger resident looks for are ample closet and storage space, amenities, social programs and a more youthful design, according to Arnold.

Isakson said that about one-third of the residents at Peachtree Hills Place, an active adult community under construction in Atlanta, will be baby boomers. “We’re not competing with seniors housing properties, we’re competing with other residential options,” he said. “They’re looking for lifestyle.”

What Isakson ultimately designed at Peachtree Hills Place was condominium-style residences with a high-end country club feel. Most units are 2,000 square feet or more with 10-foot ceilings. Phase I of 125 units is expected to open about a year from now. All but 12 of those units are under contract, according to Isakson. The average price point is $1 million.

— Kristin Hiller

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