Senior housing developers have been ready to go for months—even years, for some—and while there’s no immediate danger of overdevelopment, cautious lenders may function as a safeguard against repeating a boom-and-bust cycle.
The annual senior housing inventory growth rate is beginning to gain traction, but was still minimal in the second quarter of 2012 at 1.3%. Meanwhile, construction as a share of existing inventory remained flat in the quarter at 2.1%, according to data from the National Investment Center for the Seniors Housing & Care Industry (NIC).
“We’re not overly concerned about [overdevelopment] in the short term,” said David Roth of Blackstone Real Estate Advisors during a session at NIC’s 22nd National Conference last month. “In all sectors, there has been very little development; we’re seeing obsolescence and net negative growth.”
The lack of development is due in part to constricted financing.
“Lenders are exercising a lot more discipline,” said John Dark, managing director of Prudential Real Estate Investors’ senior housing team, during the session. “The guarantees they’re asking for now are far more extensive.”
A lot of lenders are practicing the ultimate discipline, Roth added dryly, by being out of business after making too many high-risk, failed loans during a prior development boom.
In recent quarters, construction levels have remained tempered across most types of senior living, said Chuck Harry, director of research and analysis at NIC. Memory care is bucking that trend, though, leading Harry, a panelist at another session, to wonder whether the level of activity was warranted. Other panelists responded affirmatively.
“Historically and currently, it’s a very under-served market,” said Ray Lewis, the CEO of Chicago-based REIT Ventas Inc. “The demand for dementia care is very high. It’s the area that has received the most amount of ground-up development capital in the past several years, but occupancy is our memory care units is very strong.”
However, with memory care construction ramping up, the industry needs to pay attention, said Noah Levy, a session moderator at NIC and managing director at Prudential Real Estate Investors. “It bears watching,” he said, because there’s “little room for error” due to slow move-in rates for facilities in the lease-up phase.
Prudential hasn’t yet financed any stand-alone memory care communities, but only because it hasn’t yet had the opportunity, according to Dark. “Our [existing] memory care units are about 95% occupied across the board,” he said. “We have assisted living communities without memory care and are doing everything we can to add it.”
For now, most lenders involved in new construction are sticking to similar guidelines.
“We meter out our development dollars to people we have a strong relationship with,” said Sharon Yester, CNL Financial Group’s chief asset management office, during another NIC session. “We will definitely do development, but we’re looking for people with a good solid track record.”
While lenders are better informed and wiser these days, says Bill Pettit, president and COO of Merrill Gardens, there are cycles when “everyone starts rationalizing risk” —leading to a danger of overdevelopment down the road. “There’s a possibility,” he says, “but I don’t see that happening for the next three to four years.”
Written by Alyssa Gerace