This ‘Key Factor’ Predicts Riskiness of Senior Housing Construction

Merger and acquisition activity in the senior housing market is at a high point, and new construction is high enough levels to drive concerns about oversupply. With all of this recent activity, it is important to know what differentiates smart acquisitions and builds from unwise ones.

One particularly important metric is penetration rate, according to Imran Javaid, managing director of healthcare real estate at Capital One.

“I think that penetration rates end up being the key factor for us for deciding whether it’s a construction project that we want to be involved in or not,” Javaid said during a Senior Housing News webinar Wednesday.


For new construction, Capital One prefers penetration rates of between 5% and 15%. 

“You want at least some acceptance in the marketplace of the kind of product that you’re looking to target,” Javaid said, explaining that “you don’t want to be the first mover” or the last.

Javaid also explained that Capital One performs on-site tours of all potential acquisition properties. This is to assess the quality of on-site staff, check out local competition and review the physical condition of the property itself.


Penetration rates should also be considered in combination with other indicators of market potential, Dana Wollschlager, senior vice president of Plante Moran Living Forward, stressed during the webinar.

Source: Plante Moran Living Forward
Source: Plante Moran Living Forward

These indicators include the area’s attractiveness as a retirement destination, the occupancy of the existing supply, and the size, age, and attractiveness of the existing supply in the market area, Wollschlager said.

Obviously, there are plenty of other metrics to consider when financing new construction and acquisitions in senior housing. Mark L. Myers, an executive director at Institutional Property Advisors, emphasized during the webinar that the value of senior housing facilities is in operations, not necessarily in the real estate.

Additional key metrics discussed in the webinar included projected net operating income, the acuity of residents, and the age of the property and market.

Written by Mary Kate Nelson

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