The Rewards—and Risks—of Senior Living Providers as Retail Landlords

The year was 2008, and Presbyterian Homes & Services had a plan for a new mixed-use senior living community.

The Minnesota-based senior living provider would develop The Promenade of Wayzata, 14.5 acres of retail, all-ages condos, a hotel and 326 units of assisted living, memory care and skilled nursing. PHS would open the condos and retail first, collect rent and later open the senior housing (pictured above).

Then the recession hit. The senior housing was now most viable, and the community’s potential retail developers were backing away. Not long after signing its development contract with the city of Wayzata, Minnesota, PHS found itself running senior housing that was burdened by unoccupied retail space, for which they were now unwitting landlords.

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“[Mixed-use] is a great thing so long as that retail space is occupied,” says John Mehrkens, vice president of development with Senior Housing Partners, the development and expansion arm of PHS. “If it’s vacant, it’s a liability to the housing.”

In the new report from Senior Housing News on mixed-use development in senior living, senior living providers, real estate investment trust executives, development managers and others explain their strategies for mixed-use senior living, diving deep into the rewards, and the risks, of taking on landlord responsibilities.

Here are four lessons that senior living providers have learned in mixed-use regarding different models for leveraging public retail, dining and other amenities in senior living communities, with a rundown on when these models work, when they struggle — and why.

Lesson 1: Outsourcing your landlord responsibilities eases the mind

Atria at Foster Square in Foster City, California. The continuing care community is part of a 15-acre, mixed-use horizontal development, and includes 21,000 square feet of retail that Atria developed and then sold. (Courtesy of Atria Senior Living)

Let’s start with the obvious: even when senior living providers see the value of developing a mixed-use property, that does not mean that they all want to be landlords. That was the case for Atria Senior Living, which opened the six-story Atria at Foster Square in 2016.

Atria developed the community — which offers 155 units of assisted living and memory care — as part of a 15-acre master plan development in Foster City, California. As part of its development agreement with the city, Atria also built 21,000 square feet of retail on the ground floor of the building. Atria owns and manages the senior living, but sold the retail space to landlord Blake Griggs Properties in nearby Danville, California.

The 21,000 square feet of public businesses include two restaurants, while a bistro, which will be part of Atria’s operation, is coming in late 2018. Public space in the community includes a multi-purpose room on the 2nd floor. Despite not collecting rent from these businesses, Atria views their presence as a benefit to residents.

“Folks with significant discretionary income are living with retail that is part of the building, many of whom will be regular customers for the retail environment,” says Mark Alexander, senior vice president of redevelopment at Atria. “Being a senior-focused master plan, most of our residents don’t or won’t have cars. They’re there to use the amenities outside the door. They’re a big draw [for the retail].”

Lesson 2: You don’t have to be the landlord — you can be the tenant

American House Senior Living Communities purchased two floors of the Henry Ford Health System’s Cottage hospital in suburban Detroit and developed them as senior living, thus creating American House Grosse Pointe at Cottage. (Courtesy of American House Senior Living Communities)

Of the 10 mixed-use senior living communities whose retail strategies we explored in this report, one that stood out as unique came from American House Senior Living Communities.

Removing the two master plan communities we studied, American House Grosse Pointe at Cottage in suburban Detroit is the only community in our report where the senior living provider is the tenant, not the building owner.

Part hospital, part continuing care retirement community, American House Grosse Pointe at Cottage is the result of a collaboration born in the wake of the struggling Henry Ford Health System’s Cottage Hospital outside Detroit. The hospital had shifted from an inpatient care model to more outpatient care, leaving it with too many beds and significant operational losses.

The solution? American House Senior Living Communities purchased two floors in the hospital in a condominium arrangement and converted them to senior living: 40 independent living units, 29 assisted living and 15 memory care.

“We’re very pleased with the form of ownership,” says American House Senior Living Communities CEO Dale Watchowski. “We are in the senior housing business, and we do that well. Henry Ford is in the business of health care and they do that well. We can live and benefit synergistically through the relationship.”

Lesson 3: Being a retail landlord can pay off for senior living providers

Azulon at Mesa Verde in Costa Mesa, California features active adult living linked with shopping center The Shops at Mesa Verde. (Photo by Jeffrey Reese, development manager)

Six of the communities in this report occupy the traditional mixed-use space, with a senior living provider as owner or co-owner of a physical property that includes public business space, typically retail or dining.

Three of them — Belmont Village Sante Fe in Mexico City; Aegis Gardens at Newcastle in Newcastle, Washington; and Azulon at Mesa Verde in Costa Mesa, California — have experienced the positive outcomes that providers expect when they take on public retail space in a community.

Two of them, the Independence Branch Library in Chicago and The Welltower in New York City, are due open in 2018 and 2020, respectively.

None of the operators for these five communities expects the rent checks coming in to be financial game-changers. They do view the revenue stream as a positive and, more to the point, see the mixed-use public space as both a draw for residents and an element in neighborhoods that eliminates a barrier to entry.

“You are going to see a demand for [senior] housing,” says David Block, director of development of Evergreen Real Estate Group, which is building two library-housing projects in Chicago, including the Independence. “Putting it in mixed-use development is certainly one way to fill that demand.”

Lesson 4: Beware — being a landlord is not always rosy

The Anthropologie storefront at The Promenade of Wayzata in Wayzata, Minnesota, a horizontal mixed-use development that includes 326 units of senior living. The operators ran into trouble when they could not fill the retail space. (Courtesy of Presbyterian Homes & Services)

With the Promenade of Wayzata, John Mehrkens learned a valuable lesson about what happens when mixed-use goes wrong.

In 2007, PHS began its pursuit of the project in large part because of the location: the region lacked senior housing. The retail seemingly just made sense to include.

The Great Recession changed those plans. PHS responded by hiring Mid-America Real Estate Group, a leasing retailer that became the development’s retail manager and their broker for finding retail tenants. Today, the retail is 60% full, with PHS still acting as the landlord.

“The vertical mixed-use works great and provides supplemental income, but you do take on the risk of vacancy as any landlord of that space would,” Mehrkens says. “In the long run, our expectation is that [the retail] is going to have tremendous value. In the short run, because retail is a fast changing element, it’s been a little bit of a drag for us — a financial drag.”

PHS has a handful of other mixed-use projects. Mehrkens sees the risk of retail as an argument for more horizontal mixed-use and less vertical, and for ensuring retail partnerships.

“Our core mission is to provide for senior housing, and when there are projects that lend themselves to retail, we are not going to shy away from those,” Mehrkens says. “But I think we are more likely to let that risk be taken by somebody whose core business is retail.”

The upside? The senior living in the community is, today, 100% occupied. Over its entire care-continuum portfolio — independent living, assisted living, memory care, skilled nursing and short-term rehab — Presbyterian Homes occupancy rates stay between 94% and 95%.

That means mixed-use remains a positive piece of the PHS future.

“I think it will probably continue to be a significant element of what we do,” Mehrkens says.

This article draws from the new report, “Strategies for Mixed-Use Development in Senior Living.” Click here to access the complete report, which takes a deep dive into mixed-use senior living, and reveals even more about how senior housing leaders are combining new models for care with new boosts to the bottom line.

Written by Jack Silverstein

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