Covid-19 Makes Quest for Middle-Market Senior Living More Urgent Than Ever

The coronavirus pandemic is highlighting the need — and current lack — of middle-market senior housing, but Covid-19 may also be opening the door for investors and operators to meet growing demand for this product.

Investor groups are studying the market landscape to determine how to crack the middle-market equation, and many see the easiest entry in distressed and value-add communities whose values have been adversely impacted by the outbreak, allowing for favorable acquisition to replacement cost ratios.

Meanwhile, providers such as Merrill Gardens and Pathway to Living are diving deep into their business models to further expand their customer base to older adults who lack the resources for pure private pay, yet whose nest eggs are too big to qualify for Medicaid and other government stipends.


One thing is clear: The coronavirus pandemic is only making it more urgent for the sector to find sustainable middle-market models, NIC Chief Economist Beth Burnham Mace told Senior Housing News.

Another financial setback for boomers

Last year, a groundbreaking report by the National Investment Center for Seniors Housing & Care (NIC), NORC at the University of Chicago, Harvard Medical School and the University of Maryland School of Medicine found that there will be 14.4 million middle-income seniors in the U.S. by 2029 — 54% of those will lack the financial resources to pay for senior housing at today’s market rates.

There is good reason to believe that Covid-19 will only increase these already huge numbers. The coronavirus crisis has resulted in massive layoffs, stock market shocks and other economic turmoil, and baby boomers were already in an uncertain financial position before the virus spread across the globe. The demographic, which totals 72.6 million people, had not fully recovered the wealth it lost during the Great Recession due to a combination of home equity values never recovering to their pre-2007 levels in many parts of the country, carrying too much debt heading into retirement and exiting their prime earning years.


Of particular relevance to senior living: The pandemic is putting added pressure on home values. Many people fund their move to senior living communities by tapping into home equity. An April survey conducted by the National Association of Realtors found that 72% of realtors working with homeowners reduced asking prices on their listings in order to attract buyers and 80% saw fewer houses on the market.

A Gallup survey released last month showed that half of Americans feel that now is a good time to buy a home, the lowest percentage since Gallup started tracking sentiments on home buying in 1978.

Baby boomers also were lagging in saving for retirement, pre-Covid. A November 2018 report from the Stanford Center on Longevity revealed that one-third of boomers had nothing saved for retirement as of 2014, when they were 58 years old, on average. Of those boomers who had saved for retirement, the average nest egg value was $200,000.

And the pandemic has placed unprecedented pressures on the stock market. A report released last month by the National Bureau of Economic Research revealed that policy responses to the virus’ spread resulted in 18 significant shifts in trading volume between February 22 and March 22 — 23 times the average pace since January 1900.

Interest in distressed assets grows

The pandemic put a halt to the longest sustained period of economic growth in the country’s history and has global economies facing the largest economic downturn since the Great Depression.

With that comes the possibility for a larger number of distressed commercial real estate assets, as the last downturn showed. New York-based data and analytics firm Real Capital Analytics tracked over $462 billion during the Great Recession — equivalent to 12.5% of outstanding commercial mortgages at the time — and determined that valuations plummeted 35%, erasing the equity in many deals. Lenders also saw significant losses and were able to recoup only 67% of defaulted mortgage value.

“The hotel, retail and senior housing sectors will clearly have more trouble resulting from Covid-19,” Real Capital Analytics founder and President Bob White wrote.

Investor groups, primarily private equity funds, are already building funds to target assets at risk of Covid-19 distress. McFarlin Group is launching a $100 million fund to acquire senior housing assets at risk of becoming distressed in part by the coronavirus pandemic, Managing Director Matt Johnson told SHN last month.

Distressed assets are one way for owners and operators to gain entry to the middle-market, as lower prices will make acquisitions more favorable than new construction from a cost basis perspective, Pathway to Living Director of Acquisitions and Strategic Partnerships Patrick DiMaano told SHN.

The Chicago-based owner-operator manages three senior housing brands: Aspired Living, which caters to the upper market; Azpira Place, which is its middle-market brand; and Victory Centre, which focuses on affordable and supportive senior living.

From 2019 through February of this year, Pathway to Living saw a wide range of opportunities in Class-A, secondary and tertiary markets, ranging from core properties to value-add assets that could be repositioned for middle-market use.

As the immediate post-Covid debt and equity landscape begins to take shape, Pathway is taking its time assessing its acquisition pipeline and looks to become more active in markets that have been hard hit by the virus, where it can build scale and expand its middle-market offerings.

“We’ve always looked for markets that have high growth trajectories. We’re going to take a look at markets [that are] a little bit harder hit by Covid. I think those will present opportunities,” he said.

Middle-market provider Innovation Senior Management is also looking at distressed assets in the current market landscape, CEO Pilar Carvajal told SHN. Based in Miami Beach, Florida, Innovation Senior Management has a portfolio of six middle-market communities, with one under development.

Innovation and its investor partner hopes to pivot distressed assets into either middle-market plays or affordable communities, based on what makes the most sense from a pro forma perspective.

“We see that there’s going to be a great opportunity to take those properties and be able to offer them to middle income and low income [seniors],” she said.

However, she also offered a word of caution, noting that middle-market providers are far from immune to Covid-19 pressures. For instance, a family member of an ISM resident recently was laid off, and then decided to move his loved one out of the community and provide care at home.

Creating the right operating model

Buying a distressed asset at a favorable price is only part of the solution.

Providers still need to contend with rising expenses and lower margins for middle-market communities. This was a major challenge even before Covid-19, and the pandemic does not make it any easier to solve for these issues, as providers now face considerably higher expenses on labor, acquiring equipment and supplies, and in other areas.

But, some of the answers to these obstacles are already being adopted in the industry’s response to the pandemic such as telehealth and technology, leaner staffing models, and a la carte services based on need.

“The biggest obstacle we have as an industry to serving the middle-income senior is our own vision of what they will accept,” R.D. Merrill Company President Bill Pettit said during a May 7 webinar on middle-market senior housing hosted by industry trade association Argentum.

Based in Seattle, R.D. Merrill is the parent company of Merrill Gardens, which is making a big play into middle-market price points through the acquisition of Blue Harbor, which expands its portfolio — Blue Harbor operates 21 communities across 13 states, and Merrill Gardens’ manages 33 communities in eight states. 

Pettit identified three core areas for a successful middle-market model: providing affordability on a private-pay basis to a person of median wealth and income; providing quality care; and yielding an acceptable return on investment to a for-profit owner and/or operator. The current senior housing model achieves the final two objectives.

R.D. Merrill conducted an internal analysis of its full-service operational model, the components that are affordable and how they could be structured to meet middle-market demand. Wages and benefits account for 32% of revenue investments and 48% of total expenses, and 70% of full-time employee hours are in dietary and care positions.

Pettit believes that tweaks to food service and dining departments — narrowing the range of options — can be a big part of providers’ middle-market strategy.

“We believe that our vision for serving middle income seniors is scalable but we have to think more creatively about what ‘full-service’ really means,” he said.

The pandemic has kicked the door for adopting technology in senior living off of its hinges. Notably, telehealth solutions and resident engagement/communication tools are among the most sought-after products, and senior care-focused tech firms are seeing more demand during the crisis than they’ve received in years.

Adopting telehealth solutions can go a long way toward reducing expenses, Mace told SHN. She also sees a greater adoption of Medicare Advantage plans as a way for future residents to save on health care costs by reducing incidents that require hospitalizations. This would have the added benefit of further reducing expenses for providers, while allowing them to open a new revenue stream.

“The question really is how we can manage health and wealth simultaneously. We have to acknowledge and recognize and be realistic about what the health characteristics are likely to be as well as what the wealth characteristics are, and we need to create a setting where wealth doesn’t run out,” she said.

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