Recognizing that the aging U.S. population is set to drive demand to unprecedented levels, companies that have focused on other kinds of real estate now are turning to senior housing.
For instance, recent months have seen multifamily mainstays Alliance Residential and Drever Capital Management enter the senior living space. While these companies are planning ambitious, multi-state pipelines of senior housing projects, other real estate firms are making their first forays into this market in a less dramatic — but still meaningful — fashion.
Such is the case of HRG Realty Management, a family-owned and operated property management and development company in Chicago. Well-known for its portfolio of apartment properties, HRG recently acquired its first senior living community, in the northern Chicago suburb of Evanston.
The motivations behind this move, as well as HRG’s approach to developing and operating the community, shed light on how residential real estate companies are adapting to the world of senior housing.
Playing to Strengths
HRG did not exactly go out seeking its first senior housing project. Instead, the acquisition opportunity came by way of its usual network of brokers in the normal course of business, COO Jeff Michael tells SHN.
Initially, Michael and other HRG leaders did not think they would necessarily keep the property — the North Shore Retirement Hotel — a senior community. Rather, they were attracted because of its prime location, in the heart of downtown Evanston; a city 12 miles north of downtown Chicago that is home to Northwestern University.
The deal may have been sealed during a tour of the property, though, when business interests aligned with personal ones. While in the banquet room, Michael’s father said, “I got married in this room.”
“I said, well, we’ve got to put this [building] back on the map,” Michael says.
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The initial purchase price was $11 million, and the deal included a strip of commercial property occupied by businesses.
After analyzing different potential uses — including a hotel and student living — HRG determined that keeping the building as senior housing was a smart option. Aware of the country’s aging population, the company decided to “take a stab” at senior living, Michael says.
But that does not mean that HRG had to start from square one in learning a new model; rather, the company has played to its existing strengths in residential real estate as it has developed the new community, which it named The Merion.
It opted against an entrance-fee, continuing care retirement community (CCRC) type of model — a decision made in part because The Mather, a well-established CCRC, is located nearby.
Instead, The Merion is a rental community, much like the apartment complexes that HRG has long developed and managed. It includes apartment layouts for a variety of price points, with rents starting around $2,100 a month and going up to roughly $4,500, says Michael.
When it comes to health care for residents, there is not a built-in continuum in which residents would move from their apartment into assisted living or nursing wings. Again, the guiding principle is to have services on an as-needed basis: Residents can utilize an on-site wellness center and can bring in home health workers to assist them as well.
The project also was a turnaround, and HRG has over the years developed this as an area of expertise, Michael emphasizes.
“There was huge value-add potential,” he says. “The typical kind of asset we look for is something that’s been neglected, with the opportunity for renovations and upgrades and changing the infrastructure.”
In the case of The Merion, that has come in the form of a $10 million renovation to the existing space and a $20 million new construction project on an adjacent lot that had been unused. The project is being financed with construction loans from Northern Trust.
The new construction is scheduled to be completed next year. It will be a tower with 65 apartments, an indoor swimming pool, a 4,000-square-foot atrium, a dining venue and a bar. The tower will complement the changes that turned the North Shore into The Merion, where the first phase of renovations were completed in May. That building ultimately will have 140 rooms; it now has amenities including a game room complete with skee ball, a gym and a pub.
In other words, HRG found a way of playing to its strengths as it entered the senior living space. In that way, it is not alone: Alliance and Drever similarly have strategies built around extending their brands and areas of expertise.
Alliance is leveraging its existing capital partners to develop high-end senior living options that will build on its reputation in the multifamily space; its pipeline is focused on the high-barrier-to-entry markets where it already has created a footprint. Drever is looking to serve its core middle-income consumer base as they age.
A Learning Curve
Needless to say, there are important distinctions between planning and operating a senior living community and multifamily housing. One of the most important is that the decision-making process for respective residents is more prolonged than a developer might be used to from other types of real estate, Michael says.
A 20- or 30-year-old often makes decisions about where to live in a fast, even “drastic” manner, sometimes in the span of a single week, he says.
For seniors, choosing a residence can be a six-month to one-year process. This has implications for fill-up rates that developers should be sure to anticipate, Michael cautions.
Marketing strategies need to appeal both to the prospective residents and their family members, he adds. And, from a management standpoint, the more intense demands in senior living create cost pressures.
“As new people in this field, we’ve looked at every aspect of our budget and our operating expenses to see where we can save and operate more efficiently,” Michael says.
The Merion works largely on an a-la-carte model; the community’s social programming, housekeeping services and access to all the common spaces is included in the rent, and there is a $300-a-month dining allotment baked in as well. But a resident has a lot of flexibility in scaling that up, and there are other services available on the premises — such as clinical services through the wellness center — that they pay for as-needed.
To help keep rents affordable, other revenue streams help subsidize the operations, Michael explains. The banquet room where his father was married now is rented out for private events, for example. Rents from the commercial tenants of the building also serve to subsidize costs.
On the ground, The Merion staff has risen to the operational challenge under the guidance of the building’s COO, David Sherman.
Sherman is no senior living newbie: For 10 years, he served as senior vice president with a real estate management company, overseeing a portfolio that included senior housing as well as various types of multifamily residential buildings and student housing. In fact, the old North Shore Hotel was part of that portfolio, and Sherman says he was excited to help breathe new life into the venerable building.
“It’s the same issues but the needs are much greater,” he says of managing a senior housing community versus another type of real estate. “If a window is tight, a student’s going to grab it and get it up and open and maybe not make any issue of it. A senior, I find that it can be a crisis. Because now someone has to go up every morning and night to close it unless you fix it.”
In another type of building, installing a new phone system might as easy as plugging it in and walking away, while a more thorough training process could be called for in senior housing. And even tasks that are common in all types of buildings — such as keeping sidewalks shoveled and clear of ice — take on greater importance when residents are frail seniors, he says.
“I would guess that companies new to this business will be a bit surprised at the difference in running this type of property versus a multifamily property,” Sherman says.
Still, the guiding principle of hospitality remains the same, he stresses. It boils down to meeting baseline expectations while being adaptive to the particular needs of seniors. This could mean letting a phone ring more times than usual when calling an apartment, to give the resident time to reach it, Sherman says.
Despite the rigors of managing a building of this type, Sherman and his team are executing at a high level and HRG is looking to the future.
“Right now, we’re focused on getting this off the ground, building a nice brand, getting it stabilized,” Michael says. “From there, it would be great if we could replicate this brand somewhere else.”
Written by Tim Mullaney