Is Aging Skilled Nursing Stock Getting Lost in the Memory Care Shuffle?

The senior housing industry is coming down off a high following 2011’s $27.3 billion worth of transactions, and there’s debate as to whether the high-octane real estate investment trusts are taking time out to digest their new purchases or are already gearing up for the next acquisition binge.

With transactions only totaling about $3.2 billion through the first half of 2012 (granted, Health Care REIT’s not-yet-closed $845 million acquisition of Sunrise Senior Living hasn’t been factored into that), comments from top senior living executives at the recent NIC conference suggest the industry is headed into a development cycle.

The aging skilled nursing stock is arguably the sector that most needs replenishment. But memory care is garnering exponentially more attention, and would-be investors are getting buzzed off the sector’s development potential. Depending on how many actually make the leap into ground-up development—and their qualifications for doing so—they might end up with a memory care hangover while the skilled nursing sector remains in a new construction drought. 

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Memory care boom, then bust?

Most newcomers to the senior housing development space are coming because they want to build memory care. With so many people potentially crowding into the sector, is there a bubble forming that will, inevitably, burst?

Not according to NIC panelist John Dark, managing director at Prudential Real Estate Investors, who said at the 22nd National Conference he’s heard the number of memory care units under development right now across the country isn’t enough to meet the demand in the Chicago area alone.

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“Every facility where we have memory care wings or units, we’re in the 90s or above [for occupancy]. It continues to be underserved,” said Brian Beckwith, CEO of private investment management firm Formation Capital, whose investments focus on the senior housing and care sector.

Despite demand, history has been known to repeat itself, cautions Margaret Wylde, CEO of ProMatura Group. There has already been a memory care boom-and-bust cycle, and if all the developers who are currently expressing interest or intent in building memory care actually do so, the market could become oversaturated.

Those interested in building new memory care units would be wise to do so as an addition or expansion to an existing senior living community, she says, rather than as a freestanding facility.

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Aging skilled nursing stock

With the spotlight on memory care, almost everyone is putting ‘Baby’—a.k.a. nursing homes—in the corner (yes, that’s a Dirty Dancing reference).

Not many developers have plans in the skilled nursing space, but with the average age of skilled nursing stock in the mid-to-late 30s, maybe they should.

The industry portfolio contains a lot of buildings that were constructed in the late ‘70s and early ‘80s—roughly the same time period that the first generation of mobile phones hit the U.S. market.

Most would agree that not only are the “mobile” phones from that era unrecognizable to those of today, they’re also functionally obsolete.

No one wants to go back to those early cell phones. Considering that seniors fear moving into a nursing home more than they fear dying, according to a survey commission by Clarity and The EAR Foundation, the same may be true of the facilities built more than 30 years ago: no one wants them. Which would you rather have, a first generation cell phone or the iPhone 5?

If I had one word to describe the outlook for the senior housing and care industry, it’d be ‘bullish.’ But the industry has a lot of work ahead of it to make a positive outlook a positive reality.

Demand for memory care is certainly growing, but the need for skilled nursing and long-term care is not going away. And in the meantime, the current stock keeps marching toward obsolescence. 

Have an opinion? Weigh in below, or send me an email. 

Written by Alyssa Gerace

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