The Era of Investment-Grade Small-Home Senior Living Approaches

Interest in the small-house senior living trend has smoldered over the last few years — but a recent Wall Street Journal story tells me there is much more fuel left to burn in that fire.

The article published last week revolves around Bill Thomas’ plans for his Kallimos Communities concept.

While I was encouraged to see the mainstream press covering senior living and this innovative concept, I was somewhat surprised to see the focus so much on Thomas — not because he or Kallimos are undeserving of attention, but because Thomas has been the small-home standard-bearer for so many years already, as the visionary behind the Green House model.

I don’t think the WSJ article reflected that small home senior living has become a movement — and a business opportunity — much larger than Thomas or Kallimos.

In this week’s exclusive, members-only SHN+ Update, I analyze the small-home trend and offer key takeaways, including:

— the small-home market is quickly diversifying and almost certainly will attract more interest from traditional, ‘big-box’ providers and investors

— persistent labor market challenges will increase the appeal of small home senior living from a business standpoint

— technology and construction innovations also are changing the small-home calculus

‘Purchasing innovation’

At our BUILD conference in Chicago last November, I hosted a panel discussion with Siobhan Farvardin, senior designer and principal at architecture and design firm HKS; and Chuck Bongiovanni, CEO and co-founder of small-home company Majestic Residences.

We talked about how small-home senior living could evolve in the future with intergenerational models and potential collaborations with so-called “big-box” senior living operators. As the discussion went on, I could almost see ears perking up among our audience members, many of whom work for big-box senior living companies.

One of the biggest reasons I agreed with Bongiovanni and Farvardin about the growth potential for small-home senior living is that there are numerous different small home options being created, with some companies scaling up their operations. That could make them a logical acquisition target down the road, or prove to the big-box companies that small-home senior living can be done at scale and deliver competitive financial returns.

In 2003, the Green House senior housing model brought small-house senior living to a national stage. Since then, the nonprofit has made a name for itself carrying the banner of small-house senior living. Green House and Thomas deserve credit for the influence the model has had; today, small-home senior living communities represent a range of uses and styles, from the more standard single-site residential buildings to creative highrise and small-home village models. Majestic Residences is one such company exemplifying the new era of small-home senior living.

Majestic is creating residential-style small-home senior living on a franchise model. Majestic is “growing quite a bit in a very short amount of time,” according to Bongiovanni. As of November, Majestic Residences had awarded 32 franchises, with six open and more on the way. The company is also planning to go international, with a project planned in the Dominican Republic to convert a school into a 20-bed small-home community.

Another company with growth on the mind is Assured Assisted Living. The company already has 16 small homes in its portfolio, and in a sign of more growth to come has hired a COO, according to Francis LeGasse Jr., president and CEO of the small-home operator.

McHenry, Illinois-based Shepherd Premier Senior Living is yet another growing provider with a small-home model. Brandon Schwab, CEO of Shepherd Premier, acknowledges that most companies operating small-home senior living are still too small to get on big-box companies’ radars.

Small-home projects typically carry costs amounting to no more than a few million dollars, and with relatively few units compared to a traditional community. For many senior living companies, that amounts to small potatoes. Still, Schwab does think the big-box companies will realize the small-home opportunity at some point.

And indeed, there are some current small-home operators that are building their operations with new investors or owners in mind, including the big-boxes. One such company is Sage Oak, which has a goal to build “investment-grade” residential assisted living communities, according to CEO and Founder Loe Hornbuckle.

“Once you see a company like ours start to have a thousand beds or more, then a merger or an acquisition starts to make more sense because now the deal size has scale,” Hornbuckle told SHN. “Sage Oak has always imagined one possible future could involve a larger company acquiring us because it’s easier to purchase an innovative company than to be an innovative company.”

None of this is to say there aren’t some larger companies and organizations already looking to invest in small-home senior living. For instance, Christian Living Communities (CLC) in 2019 examined opening a small-home community in Denver with Bill Thomas’ Minka company. And the highrise small-home model has been included in additions at CC Young in Dallas — designed by HKS — and Goodwin House, a life plan community in Alexandria, Virginia.

And don’t count out private equity’s interest in small-home senior living companies. There’s a tremendous amount of private equity capital looking for a home, and traditional senior living deals are competitive, with many established operators already tied up with PE partners. Small-home providers may be an attractive alternative to PE investors — and Majestic Residences’ Bongiovanni is one player who is familiar with what it takes. He previously founded and remains a minority owner in private equity-backed senior living placement service CarePatrol.

Even some who came from the big-box world — such as Jim Stroud, co-founder and former chairman of Capital Senior Living (NYSE: CSU) and current president of Dallas-based holding company Stroud Companies — believe it’s only a matter of time before larger senior living companies embrace the small-home trend.

“I’ve come from the big company mentality and understand it,” Stroud told SHN in 2020. “The big companies are going to recognize this product type, and they’re going to recognize that smaller is better.”

Staffing and technology as game-changers

The real estate equation for small-home senior living can be challenging, as these communities feature fewer rentable units on a given tract of land. But changing operational considerations, and evolving technology and consumer expectations, will increasingly come into play.

On the labor front, the senior living industry is in the midst of a staffing crisis of historic proportions — and it likely will not let up any time soon. In fact, the situation is not likely to improve until 2023 or beyond, according to 70% of respondents to the recent 2022 outlook survey conducted by SHN and Lument.

With labor costs on the rise and not keeping up with rate increases, margins are under pressure, and owners and operators increasingly will perceive that a new approach to staffing is needed.

With far fewer residents than a traditional senior living community, small-house communities require fewer workers to operate. They typically carry staffing ratios of one resident for four to eight staffers, meaning that residents get more time with the same people every day.

And small-home communities often embrace the universal worker philosophy, where workers can handle many different tasks, meaning that operators don’t necessarily have to hire out for multiple roles at once.

Thomas again is thinking big on the labor front, with Kallimos Communities planning to employ an innovative labor model featuring roles such as “weavers” to handle aspects of social engagement and “keepers” to handle areas such as transportation and cooking.

Workforce housing is something operators in the larger senior living industry have invested in over the years, but not in a particularly large way in part due to the challenges of housing dozens of workers on campus. But the size and layout of small-home communities makes it possible for workers to live onsite, a practice that some operators, such as Majestic Residences and Assured AL, already utilize. That too could serve as a differentiator for some residents and staff who crave a deeper connection with the community in which they live.

There is also evidence that small-home communities carry infection control advantages during downturns like a pandemic, potentially making them more attractive places to work. A recent study of Green House and other small-home senior care communities showed that the product type had fewer Covid-19 cases and deaths as of the summer of 2020 when compared to traditional nursing homes.

The bottom line is that small-home senior living communities could offer an alternative for workers that feels safer, and one that comes with less of the stressors of life in a pandemic. If that results in lower turnover and reduced labor costs, the financial calculus behind small homes starts to shift.

Then there’s the fact that construction costs are currently sky-high and project timelines are highly uncertain, given supply chain disruptions. Innovations in prefabricated and modular construction could ease these pressures and potentially can be employed to manufacture small homes at scale on a predictable timetable. Already, such practices were a lynchpin of Thomas’ vision for his Minka small homes.

Technology innovations such as passive health sensors and voice-activated assistants also are expanding the possibilities for small home settings to be viable not only for lower-acuity older adults looking to maintain their independence but for higher-acuity individuals as well.

Many existing small-home models — like that of Majestic Residences or Assured Assisted Living — focus on higher-acuity residents, and Bongiovanni believes this is an opportunity for big-box communities to diversify their product offerings and make room for the first wave of boomers.

“That younger senior 70 to 75 does not want to be with the … person who’s 86,” he said during BUILD. “There almost has to be some evolution where some of the big-boxes will build some of the smaller homes to take care of those with high acuity.”

The only question in Jim Stroud’s mind is whether the big-box companies would incorporate it into their current designs or venture into standalone models. Given the popularity of having independent living cottages on the same campus as apartment-style communal living buildings, it makes sense that providers would experiment with a mix of higher-acuity small-home units with more traditional community buildings, perhaps in pocket neighborhoods.

Finally, there’s the reality that demand for larger living units is on the rise. At BUILD, Atria CEO John Moore said that the most common mistake in senior living development is underestimating the need for spacious living units. As developers grapple with the need to build larger units in communal buildings — while also delivering the amenity space that boomers will expect — the math behind creating apartment-style buildings versus clusters of small homes will become narrower.

At the end of the day, it will take more than technology and advantages in staffing for big-box companies to jump headlong into the small-home sector. Similarly, developers and capital providers will need to be able to make the financial math work and replicate it elsewhere to undertake more of these projects.

But while the timing of the trend’s rise is unclear, what is clear to me is that the conditions are riper than arguably ever before for the small-house trend to get much bigger in the years to come.