Development booms have come and gone in the U.S. seniors housing industry over the past 20 years. In the late 1990s, the construction wave was fueled by Wall Street investors. Another building boom occurred from 2004 to 2007 when all forms of real estate were awash in capital just prior to the Great Recession. Now the seniors housing industry is in the midst of another burst of construction activity, most notably in Texas.
So, how does the sharp upturn in new construction over the past few years compare with previous boom times?
“I would say it’s quite similar,” said Patricia Will, founder and CEO of Houston-based Belmont Village Senior Living. “That is to say in places where it’s relatively easy to develop, there is lots of open land. When you combine that with the kind of liquidity we see now and we saw in the mid-2000s and in the late 1990s, you are going to get what I would characterize as oversupply. This cycle is no different in that respect. There isn’t sufficient institutional memory to discipline both equity and debt when it comes to putting capital out. “
Patricia Will speaks on the “State of the Industry” panel at the InterFace Seniors Housing Texas conference.
Will’s remarks came before an audience of over 240 industry professionals at InterFace Seniors Housing Texas on Nov. 19. The one-day program at the InterContinental Dallas hotel in Addison, located about 15 miles north of downtown Dallas, attracted developers, operators, lenders and brokers, among others.
What’s getting built in Texas? Of the 6,525 seniors housing units under construction in the major markets of the Lone Star State during the first quarter of 2015, 2,615 units were designated for assisted living. Another 2,347 were for independent living, followed by 1,503 memory care units and 60 skilled nursing units, according to the National Investment Center for Seniors Housing & Care.
Not all submarkets are equal
During the “State of the Industry and 2016 Outlook” panel discussion — led by Allen McMurtry, executive managing director at Cushman & Wakefield — Will acknowledged plenty of seniors housing construction activity is taking place in metro Dallas, but cautioned against painting Dallas or any other major metro in Texas with a broad brush.
A few years ago Belmont Village Senior Living opened a community in Turtle Creek, a neighborhood in the Oak Lawn area of Dallas. The community offers independent living, assisted living and memory care. “It’s the largest single asset that we’ve ever built, with 210 licensed units. It may be the best performing community that we’ve ever done,” said Will. Belmont Village and Welltower jointly own the community.
“Infill sites here in Texas will continue to do very well. The three that we’ve opened over the last two years have performed better than anything we’ve ever opened in 20 years, even in the face of a landscape that is relatively littered in the easy-to-develop suburbs,” added Will. “You really have to look to the submarket as you did back in the 1990s and the mid-2000s.”
Fellow panelist Jeff Sands, managing principal and general counsel at HJ Sims, an underwriter of tax-exempt bonds in the seniors housing space, disagreed slightly with Will’s assessment of today’s development wave versus past cycles.
“In 1999 and 2000, we saw Wall Street come in, and they were crazy in terms of the money. In 2004 and 2005, we saw the international banks come in, and they really had no discipline,” recalled Sands.
“There is a little more discipline today. I don’t know how good the institutional memory is,” continued Sands. “The domestic banks have more restrictions [placed on them]. They are at least lending at a little bit lower loan-to-value, and it keeps some of the people who were getting almost 100 percent financing out of the picture.”
However, Sands was quick to point out that if lenders were to throw caution to the wind, he could see how an oversupply situation could develop.
New supply is warranted
The product currently under construction equates to approximately 4 percent of existing inventory, said Jon DeLuca, president and CEO, Senior Lifestyle Corp. “I’m not too concerned. The good thing is this is a growing industry and we need new supply.”
As of June 1, Chicago-based Senior Lifestyle Corp. was the eighth largest owner of seniors housing nationally with 16,685 units spread across 176 properties.
Obviously, developers need to be cautious in markets where no barriers to entry exist, added DeLuca. “But I’m still very bullish on development if you are building with the right operator and you are teaming up with the right equity source and you are vetting the markets correctly.”
Carey Hendrickson, senior vice president and CFO of Capital Senior Living (NYSE: CSU), said the most prominent lenders in the seniors housing sector doing business today have endured past cycles are stronger for having done so. “There is a little more discipline this time. I think they will be more prudent about their investment choices.”
Dallas-based Capital Senior Living operates 121 senior living communities in geographically concentrated regions with an aggregate capacity of approximately 15,400 residents. Although the company acquires rather than develops properties, Hendrickson has observed a more targeted approach to development in this cycle, particularly toward higher-income areas.
“That is because the cost of construction is high, and to get a reasonable return on your investment you’ve got to have a price point that is higher than most of the middle-market kinds of communities,” said Hendrickson. The wave of freestanding memory care facilities is also something he hasn’t seen in past cycles.
Joe Weisenburger, vice president of seniors housing at Toledo, Ohio-based Welltower (NYSE: HCN), said the real estate investment trust seeks long-term growth in net operating income by partnering with best-in-class operators.
“We’re in joint-venture models with our clients that show growth. That’s only going to be driven by picking the right markets and submarkets. A building in the middle of Texas is just not something we’re going to be interested in,” said Weisenburger.
Welltower owns more than 1,400 properties in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties.
“We’ve been fortunate to have a great cost of capital, and we have had a lot of growth,” said Weisenburger. “But without the operators that we work with — and I work with everyone on this stage — we wouldn’t be where we are.”
By Matt Valley