As Some Senior Housing Developments Stall, Opportunity Awaits

It’s no secret that many developers without senior living experience have entered the sector in recent years, seeing that demographics are set to drive demand. Established operators have anticipated that some of these projects will sputter out of the gate, presenting acquisition opportunities—and that is already coming to pass, faster than some expected.

That was one of the insights shared during a C-suite panel discussion on May 3 at the 2018 Senior Housing News Summit in Chicago. The wide-ranging talk included advice from leaders at three senior living organizations: Eden Prairie, Minnesota-based New Perspective Senior Living; Burlington, Massachusetts-based Northbridge Companies and Chicago-based Pathway to Living.

Despite a growing number of opportunities to snatch up distressed properties, providers still need to be choosy and cautious, carefully weighing the factors that will go into a turnaround. The same principles apply for ground-up development, as well.

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‘Why aren’t you making this work?’

There has been a tendency among some developers to rush into building a senior living project, then unfairly blame third-party operators if occupancy fails to hit pro forma projections.

And that’s due in part to a “misalignment” between the two parties, according to Todd Novaczyk, CEO of New Perspective Senior Living. It’s also owing to projects that were built to pack in residents and drive returns, without enough consideration of consumer needs and wants.

During the panel, Novaczyk recounted recently touring five different potential acquisition targets—all communities with small rooms and less than ideal occupancy.

“[Some developers are] trying to get as many units into a piece of dirt to get a return, [and then asking operators], why aren’t you making this work for me?” Novaczyk said. “That’s a real issue going on right now, and there’s a lot of people jumping into this business.”

Wendy Nowokunski, president at Northbridge Companies, agreed, and compared the current senior living development landscape to what she witnessed in the mid-1990s, when developers from outside the senior housing industry rushed in to get a piece of the pie.

“Everybody got into the business because they saw it as an opportunity, whether it was hotels, developers or people in the health care business not fully understanding the full scope of what senior living is all about,” she said. “A lot of people look at it from a real estate perspective, but it’s an operating business with a real estate component, not real estate with an operating component.”

Buying and building

While New Perspective didn’t end up biting at any of those five properties, there are opportunities to turn around a less-than-ideal building. And those opportunities are here right now, if you look for them, Nowokunski added.

In New England, where Northbridge operates, a hot real estate market and rising construction prices have pushed the company to lean more heavily on the acquisition side. Nowokunski recalled one acquisition her company completed in which a relatively new property they bought had an occupancy rate of 40%.

“We changed product mix. We certainly changed out management and staff,” she said. “That community is successful today. While it wasn’t something ideal that we would have built, the market was good and there was an opportunity there.”

For Novaczyk and New Perspective, a smart acquisition means weighing a wide variety of attributes beyond price and location.

“If the market’s right, that’s really the key. Location, location, location,” he said. “However, you have to think in terms of the adult child, not just today, but five to 10 years from now, and what they are going to want and demand for Mom.”

And they probably won’t want a 500-square-foot apartment for their loved ones.

“If you’ve got a bunch of studios and you’re trying to maximize your return on your investment, I dont see the adult child getting into that situation,” he added.

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Finding the right market

Major markets aren’t necessarily the places senior housing developers and operators should target. Some smaller markets present opportunities for expansions—especially ones that are home to middle-class consumers.

“We just opened up a while back in West Fargo, North Dakota,” Novaczyk said. “The community’s off to a great start. Lots of 85-year-olds with money, and a lot of people would not have ever even thought about that.”

Older adults with enough money to move into a senior living community are just one piece of the puzzle, though. Developers and operators should also consider whether the market they’re serving has a big enough labor pool to sustain their employment needs.

“The biggest challenge is not only cost of development and the cost of land, but labor,” Nowokunski said. “You need to make sure you have the right foundation of people to provide a good quality of care and the best quality of life for residents. That should be first and foremost.”

Senior living providers would do well to take a “market-down” approach when figuring out where to grow, according to Jerry Finis, CEO of Pathway to Living.

“[Ask yourself] why you want to be in a market first, rather than ‘here’s a great piece of dirt,’” he said. “It may be a great piece of dirt, but it may not be the right time.”

One crucial piece of advice he had is this: know the business as customers see it. Instead of taking an “if-you-build-it-they-will-come” approach, Finis said developers should know exactly who they’re building or buying for.

“Understand this business from the customer, out,” Finis said. “If you don’t do that, you’re going to make a bad real estate decision.”

Product type can help senior living providers stand out in a crowded marketplace. For example, Northbridge is currently evaluating opportunities in the independent living market.

“Assisted living has been on this major growth spurt, and there has been virtually no new independent living,” Nowokunski explained. “That also does provide an opportunity to meet a middle market need.”

To that end, the panelists agreed the senior living industry could eventually resemble the world of hospitality, with providers launching niche products that cater to specific demographics they serve. That might mean more senior living communities develop distinct brands for their active adult, independent living or assisted living communities, even if they all exist on the same campus.

This should help consumers find an option that not only has the right price point but the right overall appeal for their sensibilities.

“We think people make a decision within 90 seconds of walking in to a building,” Novaczyk said. “If they don’t see people they feel looks or acts like them, it’s like, nope, it’s not me.”

Written by Tim Regan

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