Senior Housing Must Compete With Retail, Multifamily for Prime Real Estate

When trying to decide whether a plot of land is right for a senior housing development, Harbor Retirement Associates (HRA) asks this question: Is there a Talbots clothing store in the area?

“Talbots selects their sites based on their catalog or internet sales and ZIP code analysis, and we know that we’re targeting the same customer,” HRA President and CEO Sarabeth Hanson (pictured above) told Senior Housing News. Based in Vero Beach, Florida, HRA is a vertically integrated senior living development and management company, operating 30 communities in seven states, with eight properties under construction.

In addition to Talbots, HRA is also encouraged by the presence of gym chain LA Fitness and women’s clothing retailer Coldwater Creek; for all these brands, a target customer is a woman in her early 50s. From a senior housing perspective, this fits the profile of the “oldest adult daughter” making decisions about where her aging parents should move. This is a customer who tends to be looking for a senior housing option close to where she herself shops, exercises, works and lives, Hanson said.

But while HRA and other senior living developers like to build near particular stores and gyms, the flip side is that they must increasingly compete with these other asset classes, such as retail and multifamily housing, for coveted real estate.

“It’s hard,” said Jon DeLuca, CEO of Senior Lifestyle Corp., of these battles for land. Chicago-based Senior Lifestyle is one of the largest senior living providers in the nation, with 181 U.S. properties as of 2017.

DeLuca and Hanson recently spoke with Senior Housing News, sharing tips for how to secure sought-after real estate and what to build on valuable infill plots.

Competing on price

Senior housing used to be built in “pastoral” locations that were remote from the hustle and bustle of daily life, but that is no longer the case, Hanson said, as residents and their adult children increasingly want to be more integrated into the community at large. HRA is looking to open buildings in places where the traffic count averages around 25,000 cars a day. These tend to be infill sites located in and around metropolitan areas.

“Typically, we look at about 50 parcels of dirt for every one that we actually close,” Hanson said. “In many cases, we’re competing with multifamily and retail.”

To out-bid these other developers, HRA has paid amounts that the company once would have considered “unreasonable”—but it is willing to bid high, if it is confident that rental rates and occupancy at the property justify the outlay, she said.

A prime example is HRA’s project in Park Cities, Texas, which opened in April and was developed in partnership with Silverstone Healthcare Company. Situated about six miles north of downtown Dallas, Park Cities is home to Southern Methodist University. The HRA building—HarborChase of The Park Cities—is on the same block as a Hilton hotel and is close to a variety of dining establishments, office buildings and banks, retail stores, a church and health care providers.

The median household income in the area is nearly $190,000—well in excess of the U.S. average of about $60,000—and the median property value is $1.25 million. Rents at HarborChase of The Park Cities run between about $6,500 and $12,000 a month. The 134-unit building includes 91 assisted living units, 29 memory care units and 14 units designated for those with early-stage memory care needs. The development partners anticipated that the community would be 50% occupied at opening.

“We paid significant dollars for the land in Park Cities, but the client there has the propensity to absorb high monthly lease rates,” Hanson said. “People say to me, ‘Hey, tell me what you’re willing to pay for raw land,’ and I say, ‘Tell me that rate you think I can generate in that location.'”

Hanson declined to share exact pricing for the real estate, but the market value of the project is reported to be around $140 million.

DeLuca (pictured below) echoed how important it is to get the math right if going up against multifamily developers for a site.

Senior Lifestyle CEO Jon DeLuca, by RoboToaster for AMN

“You pay more the land, typically, on an infill site,” he said. “If you don’t have the density that a multifamily provider would possibly have, your unit price for the land goes up dramatically, and it’s harder to pencil out.”

Construction costs for infill projects also tend to be higher, he noted.

While it is possible to match the price point of multifamily and retail, senior housing has other cards to play as well, Hanson and DeLuca both emphasized.

“One tactic you can try to use is to convince the local municipality or jurisdiction of the benefits that come with senior housing versus multifamily,” DeLuca said.

These benefits include less of a traffic increase, because fewer senior living residents drive, he said. Hanson also raised this point, and said that overall, senior housing places less strain on the local infrastructure. They will not be bringing in additional children for the school district to absorb, for example.

There is also more understanding of what contemporary senior living offers, which is reducing the number of “not in my backyard” objections that have plagued more institutional nursing homes in the past.

“Quite frankly, it’s becoming much more socially acceptable in many markets,” Hanson said. “People are seeing the difference between their grandmother’s nursing home versus what we’re developing today.”

Getting the right mix

Securing urban infill real estate is not easy, but it’s only half the battle. Filling these communities is far from a sure thing, DeLuca said.

Many prospective residents for these types of properties are already living in, say, a five-mile radius. This means that they already have access to all the neighborhood’s amenities and may already be receiving health care in their home or in community-based locations. It’s difficult to convince these older adults to move from their houses or condos into a senior living community, even if the social aspects are a major benefit, DeLuca said.

Given this reality, it’s important to get the right mix of independent living versus assisted living versus memory care. Senior Lifestyle begins with more needs-based AL and memory care—in part, because the resident profile is essentially the same for IL and AL, in DeLuca’s estimation. Both residents are around 85 years old, although the IL resident tends to be bringing in some sort of home care aide.

“We first say, how many units of assisted living and memory care would we like, that we think fits this market, and then if we have the ability to expand that and also do some IL units, we’ll do that,” he said. “But we back into IL, knowing that it’s really AL-in-waiting.”

The percentage of IL can range significantly, though, between 15% and as high as 50%, depending on the total number of units. DeLuca also concedes that assisted living and memory care have been challenged by new supply more than independent living, but notes that the most recent industry statistics show IL occupancy beginning to soften.

HRA is more bullish on independent living, considering that new competition is fierce in assisted living and memory care, and there’s a lot of IL out there that is 10 to 15 years old, Hanson said. This is because AL and memory care fared better during the Great Recession, being needs-based products, and investors took note. So, capital flowed into assisted living and memory care as the economy rebounded, but less has gone to independent living, creating pent-up demand for new offerings in this space.

“Any new [independent living] inventory is leasing up quickly, at unprecedented rates, for each of our markets,” Hanson said.

Still, HRA does not build standalone independent living, but embeds it in a continuum with assisted living and memory care attached. Perhaps 40% of the time, IL will be added to the mix, Hanson estimated, and that’s following “a tremendous amount of due diligence.”

HarborChase at The Park Cities does not have any independent living, for instance. However, HRA is preparing to open a new community in the Orlando area that is 100% pre-leased in IL, Hanson noted.

She also concedes that drawing independent living residents can be tricky, for the reasons DeLuca cited. Still, there are many factors that prompt people to move into independent living, and it too is a needs-based offering to some extent, she emphasized.

“People looking to move into IL may have recently lost a spouse and are not interested in living alone in a big private home, or they’re looking for social engagement, or they’ve lost or chosen to give up their driver’s license,” she said. “But you’ve got to build to the demands of the market.”

Written by Tim Mullaney