With certain markets notably “over heating” from a development standpoint in senior living, many are are eying new opportunities beyond tried-and-true markets as demand for all senior housing products are projected to surge in the coming years.

Those opportunities come both with challenges—and benefits.

Footing the extra capital and time it takes to zone and build in difficult markets—by senior housing industry standards—might be a deterrent for some senior living developers, but for others it’s a herculean effort that’s worth it, they say.

Tough markets, like California and New York, require a lot of upfront cost because of various state-specific regulations, says Aaron D’Costa, director of senior living acquisitions with Virtus Real Estate Capital. But once a developer’s project is approved, the reward is seen in the numbers: decreased competition, which allows for higher rates of return.

“It’s quicker to get a project done in markets with minimal zoning hurdles,” D’Costa says, noting that in Houston a developer might be able to get a permit to build in 30 days, versus in a more difficult market wherein the same process could take years. “But, at the same time, markets with lower barriers to entry often have greater competition and the push for occupancy usually results in lower rents.”

It’s a “Catch 22″, he says.

“Developers are in the business to get projects done and done quickly so they can move on to the next one,” he says. “So in more challenging markets or states, and for sites with greater opposition from zoning boards, townships, [etc.], a developer might be more apt to choose a different path—one with less resistance. Yet what’s often the case is that a market where approvals are difficult can prove to be a boon since competition is limited.”

Withstanding the Entitlement Process

Developers and operators who eye challenging markets say it has paid off, but is not without risk.

Before plans for the development of The Kensington’s assisted living facility in Sierra Madre, Calif. could be finalized, community members had to vote to approve its construction. Voting on related zoning changes is part of the city’s entitlement process.

Putting the project on the ballot puts it in a vulnerable spot — residents could vote, “NO,” said Daniel Gorham, partner with assisted living facility developer Kensington, earlier this year about the gamble some developers take.

California’s zoning laws, which allow for greater debate from local government officials and community members than other markets, also has an upside.

“It allows for more input into the design,” D’Costa says.

Carlsbad, Calif.-based Integral Senior Living operates 25 communities in The Golden State, and provides consulting on new senior housing developments.

“There are a lot of barriers to entry in California,” says Collette Valentine, chief executive officer and chief operations officer of Integral Senior Living, adding that for one community it took 12 years for the entitlement process to be approved.

“If the land is zoned for agricultural use, and you want to change it to senior housing you have to go through land surveys, studies of what it would be like and the impact to the environment and city — the regulations are city-specific,” she says.

In New York, developers must submit a building plan, a capital plan with partners named and a license at the same time — creating a lot of upfront work for a project that might not be approved, D’Costa says.

“They may spend a lot of time, energy and money without having a project, and for that reason some developers would choose not to build there,” D’Costa says.

Spending More for Location

And then there’s the actual cost of building.

“You have to keep in mind the locations,” Scott Brinker, CIO of Health Care REIT (HCN), recently said during an earnings conference call. “These aren’t markets [like] in suburban markets in Dallas, these are in infill markets in Los Angeles, and Long Island and London. And the cost of construction in those markets today is at least $400,000 per unit, that’s without any of the working capital or the five years it takes to get entitled. So, I know those numbers sound high, but that’s what it costs, and that’s the timeline to get something built in the markets where Sunrise’s portfolio is located.”

Sunrise Senior Living, in which HCN owns a 24% interest, operates communities internationally, including in California and New York.

“These markets are tough,” DeRosa said. “It’d be hard for us to find good, quality senior housing beds on the island of Manhattan. But, they do need to have senior housing alternatives.”

Written by Cassandra Dowell