While senior living capital expenditure allocations were gradually increasing before the Covid-19 pandemic, some leaders were concerned that investment in buildings still was insufficient and leading to an impending crisis related to obsolescent properties.
Today, issues with buildings pre-pandemic have only been exacerbated by the virus, making CapEx investment more vital, even as such spending becomes more difficult due to increased expenses, reduced revenues and project complications related to Covid-19 restrictions.
The pandemic has also opened a window for owners and operators to reassess their CapEx priorities to prepare their communities for future extreme events and better protect them from more frequent operational challenges such as the flu. Positioning buildings in order to capture resurgent demand and rebuild occupancy is also top of mind.
Owners and operators are embarking on new CapEx strategies, with the pandemic a determining factor, if not the driving force behind their reassessments in what types of projects to pursue and how much money to allocate in 2021 and beyond.
“Every leader of an organization wouldn’t be doing their job if they didn’t stop, review, and reassess [CapEx spending], and redistribute if necessary,” Greystone Communities Co-CEO John Spooner told Senior Housing News.
Financial, logistical challenges
Higher expenses incurred from mitigating the coronavirus in the form of sanitation materials and personal protective equipment (PPE), and restrictions on who can enter communities, are forcing operators to slow or temporarily halt CapEx projects.
Furthermore, an uptick in residential construction over the past year will likely result in continued elevated labor and materials costs, even as nonresidential construction starts decline, according to a new construction outlook report released by real estate services firm Jones Lang LaSalle (NYSE: JLL).
For the full year 2021, JLL predicts total materials costs to rise between 4% and 6%, and labor costs will rise between 2% and 5%. Nonresidential construction, meanwhile, will decrease between 5% and 8% in the first half of the year, before rebounding in the third and fourth quarters.
Greystone is one provider using Covid-19 as an opportunity to reassess its CapEx strategy. Other providers are increasing their CapEx allotments in 2021 and beyond, and not every provider is scaling back.
Bridgewood Property Company typically allocates between $300 and $500 a unit on CapEx, and is budgeting higher CapEx spends in 2021 and 2022. But the extent of the increase at the community level varies, based on the age of a building, President Jim Gray told SHN. The Houston-based company has a portfolio of 34 communities in Texas, Oklahoma and Arkansas, all managed under Bridgewood’s management arm, Retirement Center Management.
“We sense a need to immediately freshen our communities to capture as many viable prospects as is feasible as the country opens up and comes out of the lockdown mentality of the past year,” he said.
Bridgewood has a large concentration of communities in Texas which were affected by last month’s winter storms, and the company will spend more CapEx on repairing damage to those communities, in addition to its scheduled allotments.
LCB Senior Living moved forward with critical CapEx projects during the pandemic, CEO Michael Stoller told SHN. The Newton, Massachusetts-based provider’s portfolio includes 33 communities throughout New England.
Stoller has been a vocal proponent of increasing CapEx allocations in senior living, and LCB typically budgets about $1,200 per unit per year on capital expenses.
CapEx allocations earmarked for design or decorations were suspended in most cases due to Covid-19, except in cases where CapEx was part of a value-add acquisition or repositioning, he told SHN. One expansion project was stopped before shovels went into the ground. Stoller believes construction will resume this summer.
“We delayed pretty much everything initially, in order to hold capital as we thought through the early stages of the impacts and realistic timelines of the pandemic,” he said.
Top CapEx priorities
The pandemic is creating opportunities for owners and operators to add new designs and features to enhance resident socialization, improve dining experiences and offer more options while keeping residents safe, and modernizing technology platforms to accommodate telehealth and telemedicine services in a safe, secure manner.
These three areas were the most important issues for residents in a recent Covid-19 sentiment survey conducted by senior living development advisors Plante Moran Living Forward and Retirement Dynamics. The report led Plante Moran Living Forward’s senior living development team to identify seven facility improvements arising from the pandemic, Partner Dana Wollschlager told Senior Housing News.
Some of these improvements were already trending prior to Covid-19, such as adding variety to dining spaces, creating meaningful outdoor spaces, and creating semi-outdoor spaces to allow outside air flow inside. Other recommendations come as a result of the pandemic, such as areas for smaller social groups, or “pods,” and incorporating social distancing markers into the design.
Plante Moran Living Forward is advising its clients to use the pandemic as an opportunity to undergo comprehensive facility assessments to determine where to prioritize CapEx spends, particularly for technology upgrades. Covid-19 exposed how far senior living lags behind other industries in adopting technology, and technology providers that struggled to gain a foothold in the space suddenly found themselves flooded with requests as owners and operators rushed to add communications and telehealth capabilities to their services.
A survey conducted last year by SHN in partnership with global health technology firm Philips found that 80% of respondents increased their tech spends, and 87% expect to increase their technology budgets in 2021.
A thorough facility assessment will identify risks from a technology perspective, and Wollschalger recommends that any tech upgrades include strengthening platforms to reduce the risk of cybersecurity attacks, which have increased in recent years.
She speaks from experience on this: Plante Moran Living Forward has experienced a 680% increase in cybersecurity attacks since the pandemic started.
“I don’t think that [providers] put enough emphasis on that,” she said. “And it’s going to matter.”
Greystone has not experienced any cybersecurity attacks so far, but that doesn’t mean that the operator is not cognizant of the threat, and its communities have reassessed tech platforms regularly throughout the pandemic to ensure that safety protocols are in place, Spooner said.
“[Leadership] are questioning their IT departments [about] how this works,” he said. “It’s getting the attention it deserves.”
Reassessing technology needs in communities extends beyond WiFi capability and cybersecurity. It also includes improving a building’s physical infrastructure and pursuing CapEx projects with infection control in mind, such as air purification. This is one of the tentpoles in LTC Properties’ (NYSE: LTC) new Smart Design Initiative. The Westlake Village, California-based health care REIT partnered with Indianapolis, Indiana-based Avenue Development to implement it across its portfolio of 107 assisted living facilities, 73 skilled nursing facilities and one health care property.
The Smart Design Initiative is intended to upgrade existing communities, as well as future proof communities under development, Avenue Development Principal and Co-Founder Laurie Schultz told SHN.
“We’re looking at what operating platforms for management can we build into the building itself,” she said. “That is going to help the safety of our buildings in the future, and also our staffing efficiency.”
Continued dining evolution
Covid-19 is accelerating changes to dining operations that were already in progress prior to the pandemic.
Notably, Plante Moran Living Forward recommends finding ways to modify larger dining rooms so that residents can leave their rooms for meals and congregate in smaller group settings. Large enclosed spaces have been shown to facilitate the spread of Covid-19. Providers should modify larger dining areas with screening elements that blend in with the existing design, effectively creating smaller dining spaces within the larger room, Wollschlager recommends.
Such an approach harkens back to the trend of creating flexible space within a community, and is something both Greystone and LTC pursued, pre-pandemic.
Greystone pushed dining services in its communities into smaller spaces that might not have been dining areas before, and is rethinking its approaches to flexible spaces as the pandemic endures. As dedicated dining spaces reopen, Greystone is spacing out tables to maintain social distancing guidelines, and increasing the frequency of changing out tablecloths and cleaning times.
“The whole process had to be rethought and changed,” Spooner said.
Providers are also continuing to look at ways to bring the outside indoors, Plante Moran Living Forward notes. For dining spaces, this can involve expanding seating outside a main dining area, using industrial garage doors that can be opened during periods of good weather, and designing dining spaces with vaulted ceilings and skylights that open.
These recommendations improve airflow through a space, which is something that LTC and Avenue considers when assessing dining CapEx allocations, LTC Executive VP and Managing Director of Business Development Doug Korey told SHN.
“Avenue and other strong developers have been doing this for years,” he said.
Creating meaningful outdoor spaces
Providers were able to leverage outdoor spaces in between massive Covid-19 waves to facilitate visitations between residents and families in a safe manner. The practice drives home the idea that outdoor spaces will prove essential in a post-pandemic design environment, and owners and operators must approach how to design outdoor spaces that encourage resident engagement, Wollschlager believes.
This was a growing trend pre-pandemic, that has been proven out over the past year. And creating meaningful outdoor space can be as simple as erecting a large tented area to provide protection from the sun. But creating meaningful outdoor space must work in tandem with a community’s programming.
“Programming your outdoor spaces is no different than programming your indoor spaces,” Wollschlager said. “If you’re not engaging your residents to go out and use those spaces, and if you’re not programming those spaces to be leveraged in a way that engages the residents, it’s a waste of space.”
Greystone committed to improving its outdoor spaces well before Covid-19, Spooner told SHN. As the pandemic continues, the organization has added fire pits, outdoor theater screens and grill stations at a variety of communities. The operator also experimented with outdoor dining spaces and is incorporating shuffleboard and pickleball so that residents can safely engage with each other, in smaller groups.
One community even created an outdoor amphitheater with seating, for presentations and events. These changes have had a positive impact on engagement. Residents formed their own smaller pods where they can gather and socialize.
“There is a big interest, and a big investment, being made in those kind of outdoor spaces for enjoyment of the outdoors,” Spooner said.