The good news in the senior housing industry is that construction activity is accelerating. The not-so-good news is that it’s happening “ever so slightly,” said Mike Hargrave, vice president of the National Investment Center for the Seniors Housing & Care Industry Market Area Profiles (NIC MAP) during a webinar hosted by Long-Term Living.
Development activity getting back to levels seen in 2007 and 2008 is still “very far off,” he said, “but we are starting to see some signs that inventory growth is starting to pick up, at least a little bit.”
Two markets in particular are seeing higher levels of construction, according to NIC MAP data: Minneapolis and Denver. They’re the only two markets NIC is expecting to see any “measurable amount of growth” over the next year, Hargrave said.
In recent times, there hasn’t been a “significant amount of construction in [the Minneapolis] market,” he said. “We’ve seen that change.”
Historically, senior housing in Minneapolis has had very high occupancy rates in the 94-96% range. The market area has gotten a “fair amount” of new development, mostly of independent living units, and a few communities have already opened, said Hargrave during the webinar. As a result, occupancy has gone down somewhat to the low 90s, but remains above the industry average of about 88.8%.
Further West, Denver’s senior housing supply increased measurably a couple years ago, with inventory growing about 28%, said Hargrave. While current levels of construction aren’t following that pace, he said there are signs that construction is ramping back up in the Denver market. “It’s worth watching,” he said, noting that most of the projects are on the assisted living side, whereas several years ago there were more independent living projects.
In order to move the needle back to construction levels seen years ago, two things need to happen, said Hargrave: Underwriting requirements need to loosen up, and some national development platforms must emerge.
While underwriting standards have already loosened somewhat, developers will often still need to provide 30-35% equity up front, Hargrave said. “That amount of equity is often prohibitive for many thinly-capitalized developers out there, and makes it so that they’ve got to go shopping for mezzanine financing, which is much more expensive.”
That limits the feasibility of projects, he said, especially taken with the current “void of any sort of a national developing platform.” Back in 2006 and 2007, senior living providers like Erickson and Sunrise Senior Living had development platforms in multiple markets. These days, it’s more regional operators focusing on specific—and limited—locations.
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Those two things need to change, Hargrave said, in order to see construction levels rise.
Written by Alyssa Gerace