Ben Seager – It’s Sobering: Why Older Senior Housing Stock Is Hard to Reposition for Middle Market
Senior Housing News
March 7, 2020
With 54% of middle-market seniors expected to be unable to afford market-rate senior housing by 2029, developers and operators are considering renovating older buildings to serve a lower price point.
Indeed, this is the top strategy for meeting middle-market demand, according to the 2020 Senior Housing Outlook report from Senior Housing News and Hunt Real Estate Capital. Forty percent of respondents said that they would reposition existing market-rate inventory as their top strategy for the growing middle-market.
Investors are expected to search for Class-B opportunities as a way to capitalize on the growing demand, but that may also drive values to the point where it would be more attractive, from a return on investment perspective, to reposition the product for market-rate housing, National Investment Center for Seniors Housing & Care (NIC) Chief Economist Beth Burnham Mace told Senior Housing News.
Complicating matters further, some existing senior housing stock may be so old that repositioning options are limited to either independent living or age-restricted senior apartments. And many older communities may be in secondary markets where accessing existing employment pools for staffing, as well as transportation options, create challenges.
There are ways to value-engineer middle-market senior housing, but the due diligence required and construction timetables may be too much for many to undertake.
“It’s a sobering thing. We have our work cut out for us,” KTGY Architecture + Planning Associate Principal Ben Seager told SHN. Seager is the firm’s service-enriched senior housing national practice leader.
Senior housing is in a historic period as an institutional-grade real estate class. Every investor type — REITs, private equity and institutional capital — is looking for opportunities.
Private equity, in particular, is driving demand and pricing. Senior housing deal value totaled $15.7 billion in 2019, according to analysis from NIC. Private equity accounted for $7.1 billion — nearly 45% of total deal volume and a 16% jump, year over year.
Moreover, megadeals such as Ventas’ (NYSE: VTR) $1.8 billion acquisition of Canadian operator Le Groupe Maurice and Welltower’s (NYSE: WELL) $1.8 billion disposition of its Benchmark Senior Living portfolio to KKR pushed senior housing pricing to above $200,000 for the first time, ending the year at $209,600 per unit.
The increased pricing makes the cost proposition for renovating older senior housing stock for middle-market tough to square, Mace told SHN.
“If you can buy [a building] at the right price, it gives [the owner] more leeway for [setting] lower rates,” she said.
The age of a building may make repositioning for middle-market use a non-starter, as well. NIC estimates around 60% of existing senior housing inventory in the U.S. is over 17 years old. Many of these buildings were not built with retrofitting in mind, and may have design features that do not lend themselves to modern updates.
Older independent living communities, in particular, were not built with modern mobility advancements such as motorized scooters in mind, and their widths cannot accommodate the added size, Mace told SHN.
Additionally, investors and operators need to assess a building’s plant, as HVAC, electrical and plumbing systems will most likely need to be significantly upgraded.
“I’m not sure if older buildings can be retrofitted [considering the costs],” she said.
There are ways to value-engineer a retrofit, however. In some markets, developers do not need to bring accessibility up to ADA standards if no structural changes are conducted on a building, Seager told SHN.
Other retrofits can include shared living quarters or restrooms. Thoma-Holec Design repositioned Cadence Millbrae, a five-story continuing care retirement community in Millbrae, California, for middle-market residents, Senior Interior Designer Ann Wenger told SHN.
The community relocated and expanded its memory care unit, and relocating it and the assisted living units to the lower two floors. Some rooms will be private, and others will share a restroom. The upper floors, which will be dedicated to independent living, include themed community lounges that were formerly being used for storage.
Passageways proved difficult to reposition. Wenger estimates that modern passageways need to be at least eight feet wide to accommodate scooters and wheelchairs comfortably.
KTGY repositioned Las Palmas, a senior living community in Laguna Hills, California, to meet middle-market demand in Orange County. In addition to freshening units and common areas, the firm expanded the community’s amenities by repurposing some living units into satellite spaces.
Las Palmas is a rare repositioning for KTGY typically the firm finds the value proposition is too high, compared to replacement costs, for these types of projects.
“We primarily do ground-up [development] as it’s our forte. But we can’t get away from [repositionings]; we have clients asking us to do them,” Seager said.
Depending on the acuity level, staff efficiencies need to be accounted for when repositioning older communities for middle-market demand, as controlling labor costs is a key hurdle to offering middle-market rates.
Labor costs account for the majority of a community’s operating expenses and are hard to control even in the best-performing markets, particularly in light of unemployment rates that are currently at historically low levels. An older building may be in a location that presents logistical challenges for staff to travel, high turnover rates and added costs to replace workers, and an over-reliance on temporary staff to fill staffing gaps, putting middle-market rates out of reach.
“[Developers need to] create the most efficient building structures [possible] for staff to capably care for residents,” Mace said.
Newer buildings are designed with hospitality as the focal point and the clinical aspect of senior living hidden from the naked eye. However, design elements are carefully considered in the best projects to allow staff to respond to emergencies in a prompt manner. By comparison, older communities were designed to be clinical, and were designed with features that may not be able to be repositioned from perspectives of cost or efficiency in order to appeal to evolving consumer expectations while maintaining staffing efficiency.
“More than ever, the ability to recruit staff is a challenge. A retrofit may be in an area that is hard for [employees] to access. That is a challenge for even market-rate product,” Mace said.