This coverage of the 2017 National Investment Center for Seniors Housing & Care Spring Investment Forum is brought to you by Mainstreet. As the nation’s largest developer of transitional care properties, Mainstreet specializes in real estate development, value investments and health care. With Mainstreet’s support, SHN is bringing event coverage of the NIC conference, which draws developers, providers and operators within the post-acute and preventative health care services space.
With supply pressures intensifying in markets across the country, senior housing projects are at risk of slow lease-ups. Careful planning and investment is critical to preventing this situation whenever possible, while those experiencing slow lease-ups need to consider their options and take action, according to industry insiders who spoke last Thursday at the National Investment Center for Seniors Housing & Care (NIC) Spring Investment Forum in San Diego.
Windsor, California-based Oakmont Senior Living largely has been able to hit or exceed pro forma lease-up expectations, thanks to a rigorous process and investments before a community opens its doors, said Vice President of Operations Courtney Siegel. Oakmont owns and operates private-pay communities throughout California.
To determine the positive impact that upfront investment can have, it’s necessary to consider the vacancy loss rate of each unit, Siegel said.
For example, if a unit is expected to bring in $5,000 in rent a month on the pro forma, that would equate to an annual loss of $60,000 if it remains vacant. Taking a small portion of that $60,000 and investing it into a robust pre-opening sales effort is therefore well worth it.
For Oakmont, that investment largely is made in people. About eight months out from opening, recruiting begins for a new community’s executive director. The goal is to have an ED in place to hire two sales directors and two support personnel, so that there can be six months of pre-opening sell time.
Another key position for Oakmont is a dedicated staff person, typically paid at $17 to $20 an hour, who is expected to know each resident’s needs and preferences and do regular check-ins, to ensure ongoing satisfaction and prevent move-outs in the first months. With this position, Oakmont is trying to reduce the risk is that in the flurry of activity during initial lease-up, new residents might see a fall-off in service, Siegel said.
Advertising also is crucial. Oakmont takes a staggered approach that begins by advertising to independent living customers about six months out, placing ads in locations such as golf courses. Assisted living ads come next, with ads in places like doctors’ offices, and then memory care is targeted about one-and-a-half months out from opening.
Effective advertising is not only about hitting the right prospects at the right time, but about establishing a distinctive brand. It does not make much sense for an upscale, amenity-rich community to try to sell itself on “the care piece,” Siegel said, especially if it’s competing against an existing assisted living provider already with a reputation for quality care.
“We identify with who we are, what our strengths are, and we don’t spend any time, energy, effort, or money on people that aren’t our clientele,” she said.
As for exactly how much money is earmarked for pre-opening efforts, Siegel did not name a hard number but offered that she’s been told to “spend every dollar I need, but not a penny more and not a day before I need it.”
This method has proven successful for Oakmont, which regularly beats the industry benchmark of 24 months from grand opening to 95% occupancy.
When Trouble Strikes
Even the best-laid plans sometimes go awry, however, putting new senior living projects in jeopardy.
Typical reasons for slow lease-ups include unanticipated new supply coming into a market, a change in ownership at nearby competitors, or rent concessions being granted at communities in the area, noted Tom Mathiesen, director of investments at Life Care Services (LCS). Des Moines, Iowa-based LCS was the third-largest senior living provider nationally in 2016, according to rankings from industry association Argentum.
In slow lease-up situations, being stubborn is not the right play, Mathiesen said.
“Don’t get in a rut by saying, ‘We underwrote this, our business plan was excellent, let’s stick with it,’” he said.
There are a variety of options that an operator can consider to accelerate move-ins, he emphasized. These include targeted incentives, creative marketing, and strategic expense control. More extreme strategies include reconfiguring or converting units from one type of care to another, to better fit gaps in the market.
Of course, banks and other entities financing the projects also have an interest in seeing the building reach stabilization on time, and will become involved if the lease-up process starts to stall.
“In a slow lease-up situation, the underlying strategy is to be flexible but be compensated for additional risk,” said Taylor Russ, vice president of the senior housing group at BOK Financial.
Interventions that a bank might consider include a change in the structure, pricing, and fees related to the financing; a change in operator or a property re-brand; requiring additional collateral; curtailing the principal; or in the most extreme situation selling or refinancing the property.
Oakmont has grappled with a slow lease-up scenario in the past, after “misjudging” a market and facing unexpected competition, Siegel said. The company responded by granting “quick burn-out” concessions such as a one-month rent break—while holding firm to its standard rate—and bringing in a local area expert. It also doubled-down on advertising efforts.
The building now is full and stable, but the experience goes to show the risks inherent in development, and why it’s essential to have contingency funds and plans in place.
“There are markets that look good on paper, and things look different by the time you get to ramp-up,” Siegel said.
Written by Tim Mullaney