A New Senior Living Development Cycle Begins: Inside 2 Hot Markets

Capital is roaring into the senior living industry. Average occupancy has ticked up for the past three quarters. New construction is still relatively down from past years.

Senior living developers might view these conditions as green lights for new projects. And to that end, construction is indeed starting to ramp back up in many markets across the U.S., including a handful where starts of new projects exceeded pre-pandemic totals in the fourth quarter of 2021, such as Dallas; Portland, Oregon; Washington, D.C.; Miami and Orlando, Florida.

But the start of this new development cycle — after a sharp slowdown during the height of the Covid-19 pandemic — brings a whole host of new challenges that could make projects harder to pencil out and fill up.

For instance, whether a market and site can support a senior living community’s staffing needs has become a critical area of focus for project stakeholders. An elevated cost of construction is also causing developers to slow down to find better opportunities, and in some cases rethink how their projects are designed or built.

For all these reasons and more, National Investment Center for Seniors Housing & Care (NIC) Chief Economist Beth Mace thinks now is the time for senior living developers to proceed with caution.

“Some of these developments are occurring in places where there isn’t a lot of nearby competition,” Mace told Senior Housing News. “Nevertheless, we know that the industry is small enough that, when there is a lot of new supply — even in a big geographic market — it still has an impact.”

Whether the industry is at risk of returning to the overbuilding of the pre-pandemic years is unclear; and Mace pointed out that prohibitive conditions for construction could render those fears moot in the months ahead.

But she saw two markets for new construction — D.C. and Miami — as particularly perilous for new senior living projects, given that construction as a share of inventory is at or near historic highs in both.

Senior living operators and developers undertaking projects in those markets are approaching the process with caution, but also are confident that they can navigate the pitfalls and deliver communities that will meet surging demand in the years ahead.

Construction snapshot in 1Q22

Although new senior living construction starts still have not reached heights seen before the pandemic, starts in the first quarter of 2022 are notably higher than the industry’s Covid lows in 2020 and 2021.

There were almost 36,000 senior living units under construction and nearly 2,400 construction starts in 1Q22, with construction as a share of inventory at 5.3%, according to recent NIC MAP data analyzing the top 31 primary markets in the U.S. That is a far cry from the first quarter of 2020, when there were 48,938 senior living units under construction, with construction as a share of inventory at 7.5%. 

But national averages are one thing — local market conditions are another. And the current national data might not capture the demand for new projects in the months and years ahead, either.

When Mace speaks at senior housing conferences, she often asks audiences to raise their hands if they are involved in new development.

“Every place I go, people are raising their hands — the whole audience,” Mace said.

Given those dynamics at play, Mace said she does feel some anxiety about the future — although she admits that is also her role as an industry economist with NIC.

“Make sure that you understand the client base that you’re really trying to attract,” Mace often tells senior living stakeholders.

Of all of the markets where there is a good amount of construction underway, Mace said she is most concerned about D.C. and Miami. Although both markets carry many opportunities for development, that also comes with the downside that they will be more popular among other senior living companies.

“If you’re an operator, you’re always going to have to be worried about what the competition is doing — and there is more competition there to worry about,” she said.

Developing in the District

A handful of notable projects are underway in the D.C. area, including a $500 million life plan community from Mather in nearby Tysons, Virginia; a new Inspir project from Maplewood in the heart of the city; and Watermark’s Elite Collection pipeline with developer Silverstone. Other companies with their eye on the District include Northbridge Companies, which is bringing a middle-income model to market in the city; and Galerie Living, which is growing its luxe Corso brand.

Although these all represent different kinds of senior living communities, they exemplify how the city has served as a hotbed for new and high-profile development projects in recent years. At the same time, occupancy has trended downward in the market since 2016.

Although new construction as a share of total inventory ticked down slightly in 1Q22, for operators developing in D.C., “the takeaway would be that there is a lot of new competition,” Mace said. The flip side to that fact is that the market has historically been undersupplied with regard to new senior living communities.

Two companies, Watermark and Maplewood, know those lessons well. While leaders with both acknowledge the market has seen an influx of new supply, they also believe there are still plenty of opportunities for savvy companies with top-of-the-line projects, and good partners on the development and construction side.

In the D.C. neighborhood of Dupont Circle, Maplewood is working with partner Omega Healthcare Investors (NYSE: OHI) on Inspir Embassy Row, which will transform the historic The Fairfax Embassy Row hotel into a community with 174 apartments and an “ultra-luxury” feel.

It’s the first community in D.C. proper in the company’s portfolio — a product of a careful development and vetting process, according to CEO Greg Smith.

“There are plenty of opportunities out there, but we are only going to develop in markets where our customer base is strong and we feel confident we can deliver a level of care and service that exceeds expectations,” Smith told SHN.

The building’s history and layout, coupled with the demographics and income level of the surrounding area, make the community “the best opportunity we have seen in the past four to five years,” Smith said.

“The D.C. opportunity really checked every box: location, size of apartments, amenity space, customer base, proximity to world-class healthcare, lack of supply and access to public transportation, which is great for attracting employees,” he added.

Still, despite the good opportunity, developing in metro areas such as D.C. is not for the faint of heart. Developers must grapple with higher costs of construction, getting along with neighbors, utilities, more government oversight and in some cases, like in D.C., complying with historical preservation guidelines and requirements.

“It is critically important to have qualified third-party consultants involved — and a lot of patience — when developing a project like this,” Smith said.

Another operator actively working on development projects in the D.C. metro area is Watermark. The company has partnered with developer Silverstone on three Elite Collection communities that are now open, another on the way in the D.C.-area market of Largo, Maryland, and more planned as part of a $700 million pipeline.

Like Maplewood, the company chooses to work with experienced partners in high-barrier-to-entry markets, according to Bryan Schachter, who is chief investment officer with Watermark. Typically, Watermark sees two kinds of projects in urban market areas: less-expensive rental communities; and high-end entrance-fee communities, usually a couple decades old.

“In the D.C. metro area, in Pennsylvania, Arizona, California, South Florida, we’re coming in with a high-end rental product that can compete with those dominant entrance-fee communities,” Schachter said.

That’s not to say every entrance-fee community in the D.C. area is an older asset, or one being disrupted by newer communities. The Mather life plan community project in Tysons, for example, has already pre-sold 80% of its units, indicating high demand from older adults in the area.

“It is a deep market and in years past it has been underserved,” Mather CEO Mary Leary told SHN in October. “We feel that we are uniquely positioned.”

And that demand should be no surprise, given that Mather positioned the community to appeal to the next generation of older adults — something Mace has urged all senior living stakeholders to do with new projects.

Moving dirt near Miami

Another hot market for development is Miami. In the fourth quarter of 2021, construction as a share of inventory hit 10.9%, representing 19 buildings under construction — the most NIC MAP has recorded during a quarter for the market. By 1Q22, construction as a share of inventory only shrunk somewhat, reaching 10.7%.

Miami is also a market that “got crushed in terms of its drop in occupancy during Covid,” Mace said, with operators having shed 12.2% during the pandemic’s worst days. The market’s penetration rate is also about 7.6%, which is lower than the typical 10% to 11% penetration rates seen in many markets.

“The low penetration rate, you could look at it as a good opportunity to grow inventory, because it’s not that highly consumed yet,” Mace said. “But with the amount of supply that we’re talking about coming into Miami, a lot of people are looking at it and champing at the bit.”

Watermark sees enough demand in the market to support new development. The company is working with developer Zom Senior Living in the Miami-area market of Coral Gables, Florida; in addition to another in West Palm Beach, which is about 70 miles north of the city.

Like in the D.C. area, Watermark is targeting development of high-end, mid-rise independent living, assisted living and memory care community projects. Permitting is a particular challenge in the Miami area, Schachter said.

“It was tough to get started on construction [on Watermark Coral Gables] because of the permitting process through Covid,” he said. “And even with a sales office, there’s been unusual difficulty in getting to the finish line on some things that we really haven’t experienced in other markets.”

Alliance Residential has also experienced difficulties in the Miami area, according to Managing Director Dale Boyles. For one, the sea level in Miami makes finding suitable land difficult, he said. But those are advantages for developers like Alliance, he added.

The company has two projects in the Miami area: an eight-story mid-rise with 186 units and Allegro Senior Living as an operating partner; and a 187-unit project in Delray Beach with The Arbor Company managing it.

“We like going into the Miami MSA, it has compelling stories that make it, as a developer, an interesting challenge,” Boyles said. “You can create value if you can overcome these relative challenges.”

At the end of the day, many senior living developers feel like they can build successful communities that cater to the whims and desires of today’s residents, even in markets that carry pitfalls for new projects. And success of these projects could be inevitable — if development and investment teams can make it to the height of the baby boomer influx.

Just ask Atria Senior Living CEO John Moore, who said last November that he believed the industry was approaching a “point where it may be too late for supply to ever catch up with demand, when it shows up.”

“Time marches on in terms of demographics,” Moore said.