The coronavirus pandemic is sparking concerns of a real estate collapse that could surpass the one associated with the 2008 recession. But senior housing could prove resilient, and new opportunities for development could arise as other property types become increasingly beleaguered.
No asset class has been left unscathed by Covid-19, but product types that rely on tourism, foot traffic and in-person gatherings to generate revenues such as hotels, retail and universities have been hit particularly hard. Some of these assets were struggling even before Covid-19, and the pandemic is just worsening bad situations. Half of U.S. shopping malls could close by the end of 2021, according to projections from Green Street Advisors.
Comparatively, senior housing appears to be weathering the crisis. Occupancy rates and move-ins are down and expenses are up, but move-outs are holding steady across the industry and operators have access to limited capital to facilitate acquisitions or refinance debt.
While owners and operators are stretched thinly dealing with Covid-19 response, forward-thinking providers, developers and investors should be alert to expansion opportunities as the pandemic alters the real estate landscape.
Hotels drowning in debt
Few asset classes have been hit as hard by the pandemic as hotels. Travel has ground to a halt, along with convention business. Hotel REIT returns have lost 60% of their collective market cap since mid-March. Occupancy and revenue per available room (RevPAR) has bottomed out.
With no revenue being generated, hoteliers are unable to service the debt on their properties. Already, some hotel owners are skipping mortgage payments and there is growing concern that defaults are on the horizon. Among the hotels at risk of default are Chicago’s historic Palmer House and the Hilton hotel on West 42nd Street in Manhattan, overlooking Times Square.
On paper, hotels would appear to be among the easiest property types to reposition into senior housing, given the similarities the two asset classes share: private rooms, large communal spaces, designated entrances and delivery areas for supplies and furniture.
And, indeed, there are a number of examples of hotel-to-senior living conversions. CA Ventures last year unveiled Travanse Living at Olathe, a $22 million redevelopment of an old Holiday Inn on the campus of the Olathe Medical Center. In 2016, Chicago developer F&F Realty converted a former hotel in Palatine, Illinois into The Grand at Twin Lakes, a 118-unit independent living community with 24-hour on-site medical staffing and over 10,000 square-feet of indoor amenities.
Yet, converting a hotel to senior housing is not a straightforward task. Quite often, hotels can be expensive to reposition, particularly for higher acuity levels of care such as assisted living and memory care, and the heightened safety protocols that will stay with senior housing after the outbreak subsides will further complicate matters, H2M architects + engineers Vice President David Mammina said during a May 27 webinar hosted by commercial real estate news site Bisnow. Based in Melville, New York, Mammina heads the firm’s health care and senior living practice.
Many of the hotel repositionings that Mammina spearheaded are older stock, dating back to the 1960s. This adds costs to bring the building into ADA compliance, re-sizing bathrooms to account for mobility issues and downsizing amenities such as conference rooms and ballrooms into smaller gathering spaces.
The pandemic is providing architects and designers with lessons in incorporating infection protocols in future design, which will add even more expense in repositioning older buildings.
“It’s kind of like the Cinderella slipper, where you’re trying to put the size 10 foot into the size 8 shoe. This is going to make it even even more difficult,” he said.
The layout of a hotel’s units and plant can make the transition to senior housing easier, Fitzgerald Associates Architects Principal Mike Breclaw told Senior Housing News. Based in Chicago, Breclaw leads the firm’s senior housing practice.
Newer buildings, especially, are more flexible and will appeal to operators providing multiple levels of care.
“[Hotels] that may have been blocked and precast are going to easily transition to higher acuity, so they can become assisted living,” he said.
The majority of hotel stock models closely to a studio apartment. Some units will eventually be combined to create larger apartments. Plumbing is easily accessible and can be extended in independent living units to create kitchens.
Obstacles arise when assessing a hotel’s HVAC system and elevator stock. Sometimes more elevators will need to be installed for access from residents with mobility issues. HVAC systems may need to be replaced to provide more fresh air and filtering capacity for residents.
“In senior housing, comfort is such an important thing. With a hotel, the bones are typically in good shape, but it’s a question how much of the inherent infrastructure is still valuable,” he said.
More shopping mall opportunities
Retail has been hit hard by the pandemic, notably department store chains — many of which were struggling before the virus spread.
The retailers that have filed for Chapter 11 bankruptcy protection during as a result of the outbreak are a who’s who of brands: luxury department store chain Neiman Marcus; fashion retailer J. Crew Group; legendary department store brand J.C. Penney; and home decor companies Pier 1 Imports and Tuesday Morning. Pier 1 is liquidating, while J.C. Penney and Tuesday Morning are each closing over a quarter of their stores.
This will result in more malls with open space at risk of failing, according to a new report from Green Street Advisors. Even as e-retailers such as Amazon have changed the way Americans shop, department stores account for 60% of anchor space within malls. The pandemic has only exacerbated a fragile situation, and Green Street predicts that half of all U.S. malls will shutter by the end of 2021.
This also raises the possibility for empty malls to be repositioned into vibrant, mixed-use developments with senior housing as a component. This trend is highlighted by the recently announced retail redevelopment in Cupertino, California, involving Related Cos., Atria Senior Living and developer KT Urban. Another prime example is Skyview on the Ridge, a repositioning of a shopping center in Irondequoit, New York that will include a $43 million, 157-unit senior apartment development from Pathstone Corporation, as well as an adult day care center from St. Ann’s Community. The project is proceeding, and just this week, the town of Irondequoit announced five finalists in a contest to name the new senior living community.
Pathstone Corporation Senior Vice President of Real Estate Development Amy Casciani told SHN last year that the mall’s location is ideally situated near Irondequoit’s population density, and that having senior housing in a former mall complements ongoing trends of backfilling empty retail space with health care to fill vacancies, increase foot traffic and create vibrant, live-work-play destinations that are essentially neighborhoods within neighborhoods.
If Green Street’s closure prediction is realized, empty malls can also be repositioned into open-space senior care communities specializing in dementia treatment. A student design team at Oklahoma State University led by Assistant Professor Dr. Emily Roberts has worked with experienced senior housing architect Jeff Anderzhon to create a prototype to repurpose a vacant, 800,000-square-foot mall in Oklahoma City into a continuing care retirement community incorporating independent living, assisted living, memory care, a medical center and workforce housing.
The possibility of having workforce housing on site may also become a growing trend, post-pandemic, as operators who found success by creating staffing bubbles as a means of providing rapid care for residents enduring lockdowns from the outbreak.
But not every shopping mall will be suited for repositioning. Some will be razed for ground-up redevelopment, such as a $130 million project in Plymouth, Minnesota from affordable rental developer Dominium that will include senior apartments. The determining factor will ultimately come to the location of the mall and demographic trends favorable to senior housing demand.
“Senior housing is much more oriented towards local demand requirements — you have to look at the saturation of the market. The clients we work with spend a lot of time studying local market demographics for their senior housing projects,” Breclaw said.
Older dormitories present conversion opportunities
The coronavirus outbreak will accelerate a move toward pursuing intergenerational housing on college campuses through university partnerships, and repurposing older student and faculty housing stock for senior housing is a possibility.
This will be spurred by schools reducing dormitory occupancies for the upcoming school year, as a safety measure. Redeveloping these buildings into senior housing keeps them operational while allowing schools to generate revenues from ground and tenant leases.
This stock is already being repurposed into multifamily apartments. Notably, the University of Chicago sold a 690-unit portfolio to White Plains, New York investor Pioneer Acquisitions in 2015. The two also closed on a 387-unit deal in 2017.
Fitzgerald worked with Pioneer on repositioning these apartments. If more student housing floats off campus, colleges will be less apt to invest in dormitories and repurpose the older stock for senior housing, effectively creating an intergenerational environment for less than replacement costs. Moreover, schools and providers can save further by leveraging campus amenities for use by seniors.
Colleges also have the benefit of built-in referral pipelines in retiring faculty and alumni seeking to age in place in a familiar environment.
University partnerships were already a growing industry trend prior to Covid-19. Faced with declining enrollments and financial pressures related to recruiting and retaining faculty, more colleges are exploring co-locating senior housing on or near campus as a solution.
Mount Mary University, a small Catholic college in Milwaukee, is planning a $45 million development including independent and assisted living for seniors and nuns, along with single mothers pursuing degrees at the school. Belmont Village and the University of California, Berkeley are developing a mixed-use development incorporating student and senior housing, along with retail. Purchase College, Life Care Services (LCS) and Senior Care Development are partnering on Broadview Senior Living, a $320 million, 220-unit independent living community on the Purchase College campus.
Rome, Georgia-based Berry College is building The Spires at Berry College, a $130 million life plan community near its campus. Lasell Village, a CCRC affiliated with Lasell College in Massachusetts, requires its residents to complete at least 450 hours per year of activities such as coursework, student mentorship and research projects.
Industry leaders such as Kendal Corporation CEO Sean Kelly and National Investment Center for Seniors Housing & Care (NIC) Founder and Strategic Adviser Bob Kramer believe the pandemic will accelerate university partnerships.
“You don’t have to build every bell and whistle into the building. If you’ve got a wonderful campus to walk around, if you’ve got all those [amenities] available to you on a campus, putting senior housing in that environment takes advantage of all those assets in a way that you don’t have to over-invest in the building,” Breclaw said.