Big players in the senior living industry have for years targeted dense, populated markets for new projects or acquisitions — but these are far from the only opportunities out there.
Other senior living companies have chosen the road less taken by focusing on less-dense secondary and tertiary markets such as Boise, Idaho; Omaha, Nebraska; and Walla Walla, Washington. While these metro areas are smaller and thus typically have less of a demographic upside, savvy providers that understand the local market can still find plenty to work with — even if they aren’t the top choice for institutional investors.
Just ask Ryan Haller, Founding Principal of Boise, Idaho-based Wellness Enhanced Lifestyle Living (WELL), as well as the former chief development officer at Avamere and founder of its Ovation venture. Haller — who has lived in tertiary markets throughout his life — said he has noticed some “stubborn irrationality” on the part of developers who only seem to line up for Class A senior living developments in core markets.
“Capital markets tend to favor core markets, and secondly, developers usually find them less risky as you get to ‘cater to the masses,’” Haller told Senior Housing News. “Yet, the developers who are willing to do the development calculus and understand the story behind the numbers, they usually find a unique opportunity in many of these markets.”
More developers than in the past may be interested in doing this kind of calculus, as the pandemic has resulted in more flexible work-from-home policies that free up people to live outside of major metro areas. Developer CA is eyeing locations such as Bozeman, Montana, that offer a high quality of life at a reasonable cost. Similarly, Vitality Living is working on a project in Tupelo, Mississippi, and CEO Chris Guay believes that smaller cities hold growing promise if project timing and parameters are right.
Across the country, private equity groups are quietly coming to some of the same conclusions, even if they’re not advertising that on their brochures, according to Beth Mace, chief economist for the National Investment Center for Seniors Housing &and Care (NIC).
“A lot of them are moving into some of the smaller markets because there’s more opportunity and because there’s not as much competition,” Mace told SHN. “You see markets like Atlanta that have been so overbuilt that you would be much better off going into … a nearby market, or a more rural market where you’re not going to have as much competition.”
‘The numbers don’t lie’
One concern among developers regarding smaller markets is that they could prove riskier than larger core cities in times of turbulence, such as during an economic recession. But beneath the surface, smaller markets like Omaha, Nebraska, or Wichita, Kansas, are more stable than they appear, Haller said.
“When you get into the data of these markets, the numbers don’t lie,” Haller said.
For example, even while posting record-high unemployment rates earlier this year as a result of the Covid-19 crisis, Omaha still had the third-lowest unemployment rate in the nation. Omaha is also home to a surprisingly large amount of top earners, including famed billionaire Warren Buffet. And, the market has a senior living product that is, on average, 20% older than those in the rest of the U.S., according to Haller.
“Omahans want the nice product that Minneapolis and Chicago have, but national developers just treat that type of market like a flyover state,” Haller said. “Yet the Omaha [metropolitan statistical area] is nearly 1 million people strong.”
Generations LLC also sees the appeal of smaller markets. Among the Clackamas, Oregon-based senior living provider’s 11 communities, several are located in tertiary markets, including Walla Walla, Washington and Montrose, California. And there is opportunity for providers that can take the time to understand a smaller market and build accordingly, according to Chip Gabriel, Executive Chairman at Generations.
“If you’ve hit a niche, you have a very good business,” Gabriel told SHN. “If you take care of the residents and take care of the employees, there’s not the competition.”
Secondary or tertiary markets might also play an important role in the effort to make senior living services more affordable for the middle-market masses, Mace said.
“The land costs are going to be less than in some more dense urban areas,” Mace said. “And if you can get the basis down, that’s part of the secret to making middle-income housing available for seniors.”
Still, there are some challenges to owning and operating communities in smaller markets. For one, it can be challenging to convince capital providers to lend money for these projects in the first place. Hiring is also sometimes a challenge due to the markets’ smaller populations, and Generations has in the past paid associates to relocate, Gabriel said.
And, some smaller markets simply don’t have the health care capacity or hospital beds to accommodate a large, aging population during an ongoing pandemic, Mace said.
As for Boise, where WELL is headquartered, Haller sees promise in changing demographics. The metro area is among the fastest-growing places in the U.S. — a fact reinforced by the sheer number of out-of-state license plates Haller notices on a regular basis.
“Active seniors come to towns like Boise and they see cost of living that is 35%-40% less than where they are coming from, with equivalent amenities, and unlimited opportunities for wellness and outdoors,” Haller said. “Usually, their adult children and grandchildren are attracted and come along for the ride.”
The pandemic effect
Although it’s still too early to tell what effect Covid-19 might have on demographic trends in the U.S., there is evidence that it could drive migration away from big cities. If those trends hold true in the long run, that could have an impact on senior living markets in the future, according to Mace.
“If those are permanent moves, you could see that adult children might lure their parents to come out and be closer to where they are,” Mace said. “But I don’t know if that’s enough of an investment thesis to invest in further-out senior housing properties.”
Still, those demographic trends give Haller confidence that there is plenty of upside waiting for providers with the discipline and patience to execute on projects in smaller markets.
“I would be remiss in saying that during the Covid-19 lockdowns, the migration trends for all ages have not been driving towards New York, Seattle, and Los Angeles,” Haller said. “In contrast, the populations of Boise, Sioux Falls, and Des Moines have been growing. Bigger isn’t always better.”