The New Pro Forma: Senior Living Developments Face Longer Lease Ups, Rising Costs

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Senior housing developers and operators are encouraged by occupancy gains in recent months.

But those stakeholders are still taking a cautious approach to underwriting development and lease-up pro formas for newly opened communities and ground-up projects, and in some cases they are expanding the size of developments to drive gross revenues and cover increased expenses and capital costs.


Some markets are performing better than others. Notably, urban infill locations which a year ago were an area of concern are leasing up faster than their suburban and exurban counterparts, some developers and operators told Senior Housing News. But in some markets, new competition is causing slowdowns in lease-ups and in rebuilding occupancy.

Additionally, some operators and developers are seeing a slowdown in occupancy gains now that summer is in full swing, and predict the industry is returning to familiar sales cycle rhythms that will extend the recovery timeline.

Meanwhile, lenders continue to focus on existing relationships with proven sponsors, and recourse requirements which tightened during Covid-19 appear to be relaxing, but remain elevated compared to pre-pandemic levels. For borrowers with proven track records, access to capital is solid.


Overall, lenders and developers are looking forward to putting 2020 behind them and returning to some semblance of normalcy, Jon Fletcher, vice president at Presbyterian Homes & Services and Senior Housing Partners, told Senior Housing News. The Roseville, Minnesota-based developer and operator’s portfolio includes 46 communities, and ranks fifth on the 2020 list of the 200 largest nonprofit operators by LeadingAge and Ziegler.

“Early indicators are that [a normal sales cycle] is happening,” he said.

Bifurcated recovery

The efficacy of Covid-19 vaccines brought about a return in consumer confidence, and providers interviewed by SHN report occupancy gains over subsequent months. But they all expect margins to be impacted because of higher expenses throughout the year.

At summer’s midpoint, many operators and owners are seeing a slowdown in move-in velocity, citing a variety of factors. LTC Properties (NYSE: LTC) CEO Wendy Simpson said during a recent SHN TALKS appearance she expected occupancy across the company’s portfolio to rebound faster than it has. She attributed the slower recovery to the ongoing havoc that Covid-19 has caused in people’s lives, with normal work and school patterns still disrupted.

New deliveries are also impacting the pace of recovery. Senior housing inventory increased by 4,300 units in the second quarter of 2021 in the 31 primary markets tracked by the National Investment Center for Seniors Housing & Care (NIC), a driving factor in occupancy rates remaining at record lows.

A recent report on Q1 2021 senior housing lease trends by Moody’s Analytics revealed that six markets with the most new senior housing deliveries in the quarter recorded sharp vacancy increases. This suggests that operators are struggling to fill new facilities in light of the decrease in demand caused by the pandemic. Those six markets were:

  • Memphis, Tennessee
  • San Jose, California
  • Vallejo-Fairfield, California
  • Ventura County, California
  • Manchester-Nashua, Massachusetts
  • Springfield, Missouri

But the challenges are not limited to those six markets. Bridgewood Property Company felt the effect of this new inventory first hand in Houston, President Jim Gray told SHN. The fully integrated developer and operator’s portfolio includes 23 communities in four states.

He noted that new competition in Houston is tempering Bridgewood’s occupancy gains in the market, although the company is still netting occupancy gains. And he expects conditions to improve moving forward.

“There are no new starts happening, which is good,” he said.

Moreover, Bridgewood reports strong occupancy gains in urban infill markets, while move-ins in suburban areas are lagging. Across the total portfolio, occupancy is trending positive.

Presbyterian opened four new communities during the pandemic, and leasing velocity has improved with vaccine availability, Fletcher told SHN. The operator has seen steady occupancy growth over the last several months across its portfolio.

On a market-specific basis, communities are faring differently due to a variety of local circumstances. Two Minnesota communities ultimately met lease up projections, but only after a high number of pre-leasing cancellations due to myriad pandemic-related factors. One Iowa community leased up more slowly, mainly due to a lack of staffing availability. One Washington community leased up slightly more slowly than anticipated, but still completed lease up within 10 months due to a prime location and competitive middle-market pricing.

Fletcher is hearing from other operators that move-ins are tapering now that summer is in full swing, but expect velocity to improve in fall with increased demand and other factors such as more vaccine clinics and the beginning of flu season.

Simpson also predicts occupancy velocity will improve in the fall.

“I think until children get back to school and the working parents can figure out what their life is, it’ll still be slow in admissions to senior housing,” she said during her SHN TALKS appearance.

Costs rise, capital availability increases

The expected slower occupancy recovery and ongoing expense pressures are forcing developers to reassess how to underwrite new ground-up communities.

Presbyterian is underwriting longer lease ups and higher construction and labor costs with its communities under development. In order to offset these costs, projects are getting larger, with more units to drive top level gross revenue to cover high capital and operating costs, Fletcher told SHN.
Construction costs are currently the hardest line item to pencil. In some markets, Presbyterian has seen materials costs increase by as much as 20%.

This uncertainty may cause some “on the fence” developments to be delayed or cancelled altogether until capital and operating costs become more predictable.

“Contractors aren’t able to give a reasonable estimate of construction costs next week, much less six months or a year from now,” Fletcher said.

But capital has returned to the market with plenty of liquidity available for worthy projects, and Presbyterian’s financial partners are long-term investors with a pragmatic approach to executing smart investments and new community expansions, he said.

Lenders, meanwhile, continue to underwrite developments from proven investors, an approach Greystone Managing Director Tyler Armstrong terms a “flight to quality.”

The influx of liquidity in the capital markets is leading many lenders to lessen the recourse and leverage requirements demanded of borrowers during the thick of Covid-19, which is aiding developers in filling capital stacks. But these requirements remain elevated and that will continue for the foreseeable future, Blueprint Healthcare Real Estate Advisors Head of Capital Markets Alex Florea told SHN.

Bridgewood broke ground in July on a new development in Charlotte, North Carolina, where the underwriting was relatively unchanged from pre-Covid times, which Gray attributes to the company being a low-leverage borrower. And he is expecting a strong lease-up once pre-sales begin.

He anticipates similar underwriting and lease-up pro formas for a planned community Bridgewood is looking to build in Nashville some time in 2022.

“Prospects are back, looking [at communities] and moving back in,” he said.

Lenders are looking at recent lease-up velocity among borrowers and comparing them to trends in their markets prior to Covid-19. The challenge is the markets are resettling, with new product coming online in most, which can impact lease velocity and increase vacancies.

Armstrong expects this to be an ongoing concern moving forward, especially as move-outs continued during Covid-19.

“The issue is [operators] weren’t able to backfill for a year. While the move-ins have been really strong in many cases, the move-outs to me have been strong, as well,” he said.

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