The drought that’s been going on in America doesn’t just apply to agriculture: it extends to senior housing development, too, and there’s been a noticeable dearth of new construction projects despite a rapidly aging population.
In the third quarter of 2012, construction as a share of existing inventory decreased twenty basis points to 2.0% compared to the previous quarter, according to the National Investment Center (NIC) for the Seniors Housing & Care Industry. However, it was due more to an increase in completed projects than to a decrease in construction starts, NIC noted.
While there is talk that construction is picking up, said Bill Kauffman, senior research analyst at NIC, based on recent data, the level of new development is still “somewhat tempered.”
However, at the annual NIC conference, held in September, there appeared to be a general consensus that new construction was beginning to make a comeback—but under certain conditions.
“Many [in the industry] are saying, ‘Let’s get into development,’” said NIC panelist John Dark, managing director at Prudential Real Estate Investors, during a session on private equity’s capital deployment strategies for senior housing.
The recent acquisition of Sunrise Senior Living by Health Care REIT highlights the most important components for new development: location, and private-pay customers.
“There’s chatter about new construction and lenders being extremely busy,” says Kauffman. “Talking to lenders, they say they’re very busy with underwriting new construction loans.”
Still, new construction financing remains a challenge for those deficient in experience and in capital, either separately or together. Banks—and REITs, to a lesser extent—will provide the interim construction financing and mini-perm status only to those who have demonstrated success in the past.
Given the state of the credit markets the last few years, that track record of success for many may not exist or may have taken time off in order to provide a compelling story.
So where are developers, operators and entrepreneurs looking? We’ve asked around, and found consensus about strong interest in several markets:
Top Development Areas for Senior Housing in 2013
The northeast and south have been pointed to as two regions that are “healthier” to develop in, according Margaret Wylde, president and founder of market research firm ProMatura Group.
Based on data collected from people between the ages of 55 and 74 with an income of $50,000 or more and a home value of $75,000 and above, these households are “very likely” to move soon—including into a retirement community, says Wylde.
Nearly a third of Northeast households within those baselines, at 30.2%, have indicated a likeliness to move, followed by 27.1% of corresponding households in the South.
Potential development sites encompass a full spectrum of markets, with favorable spots depending on multiple factors including age and socioeconomic demographics of potential residents and their adult children; barriers to entry; and scope and performance of existing supply.
“What we’ve noticed is that people are interested in a very broad range of markets, from concentrated development in a limited number of mega markets, to others interested in rural, smaller markets, or medium-sized ones,” says Phil Downey, principal at Senior Housing Analytics.
In the following weeks, we’ll do a more in-depth post about each hot spot on our list, with relevant demographic information, NIC data, and industry input. In the meantime, feel free to email or comment with your top picks and predictions for senior housing development in 2013.