In recent years, Ryan Companies has been among the most active developers of senior living communities. And looking ahead, the company is deepening its focus on active adult.
The Minneapolis-based development, architecture and construction company is actively pursuing active adult projects across the country through strategic partnerships, according to Julie Ferguson, executive vice president of senior living.
For Ferguson and Ryan Cos., the product type offers potentially lower construction costs, more competitive resident rates and needs far fewer workers than traditional senior living communities.
“It does represent a huge opportunity, and … it is something that Ryan Companies for 2023 is very focused on,” Ferguson said during the Senior Housing News podcast Transform.
But as excited as she is about the active adult sector, Ferguson also sees some pitfalls on the road to recovery. Interest rates will pose challenges for new projects, as will the availability of debt and equity. But for well-capitalized companies with development know-how, those barriers to entry are also hurdles for new competitors to vault over.
“Ryan’s focused on not resting on what we have today, but how we are creating the next wave of what our residents are going to want,” she added.
Highlights of Ferguson’s podcast interview are below, edited for length and clarity. Subscribe to Transform via Apple Podcasts and SoundCloud.
On what Ryan Cos. is focused on at this point in 2022:
Everybody’s in strategic planning and budgeting mode for next year, and what we are planning to do. We are really focused on the projects in the markets that have the demographics that we’re looking for, and that we believe are necessary for a successful senior living project.
The great thing about Ryan Companies is that I don’t have a quota. I don’t have a have-to-get-projects done [mindset], I have a do-good-projects-in-markets-that-we-think-will be successful [mindset].
When I look into 2023, we have, I think, seven projects right now in our pipeline that we feel good about. We probably have 20-plus that we’re actively looking at and we think seven of those or so will pan out. We had a pretty quiet year, as far as Ryan Companies goes.
So last year, we did six new developments, and we will only get three new ones in the ground this year. That being said, I have nine projects that are actively under construction, most of which finish next year. So next year, we’ll have a lot to do with opening projects and the pre-leasing of those. We’re a national platform, so that seven is really spread across the country.
The other focus is we are getting into the active adult market. And so we have a team of folks who are actively pursuing some active adult projects across the country with some strategic partnerships.
On developing senior living projects amid current headwinds:
I’ve got a team of people across the country who are continuously looking for well-located, well-priced land. And that’s probably some of it. Certainly, we are in a lot of markets. And so we often see opportunities that maybe others don’t, because we have relationships with so many different people.
The other piece of this is, because we are a national platform, we can take our learnings from one market to another. And so we’re always seeing what’s coming next as it relates to construction costs. While we’re bidding something, we’re seeing how it’s actually playing out when we’re buying it. And so we get a little bit of a preview on how construction pricing is going to play out, which in the last couple years hasn’t been great.
We’re starting to see some signs of relief on the construction cost pressures coming in the early part of 2023, which gives us a lot of optimism around being able to get projects done. That being said, on the flip side, we’ve got some interest rate headwinds that are headed our way or have already hit our industry to a certain extent. We have a lot of banking relationships. Fortunately for us, thus far, we haven’t run into any issues finding debt or finding equity for the projects that we want because of the size of our platform.
Again, we’re a national company, so we have a little bit of buying power that some others may not have, and we can do some creative things as it relates to that that maybe some others can’t.
As long as we continue to believe in the space, we will continue to build in this space. If we can continue to, we will be opening projects in the next two to four years that will be in the lowest competitive environment that we’ve ever had. The key is to figure out how you exist in that environment where others are stuck struggling or can’t get things done. And, how do you find those competitive advantages that you might have?
When I was at The Fountains [now Watermark Retirement Communities] we bought 24 projects in less than 20 months, because we thought that was the thing to do; to be doing something when nobody else was doing anything.
Our big thing is looking at the macro level. First is what markets do we believe in? Do we believe in this product type? Ryan Companies builds a lot of different products in a lot of different sectors. If we think senior living isn’t the thing to be doing, we can throttle back on senior living and push our resources to multifamily or industrial. Or if we think one of those is having some headwinds, we can push our resources to the different product types and the different sectors that are having success.
That scale affords me a lot of flexibility in what we’re doing. And as long as we continue to find good sites and good markets, we will continue to build. We’re really about the fundamentals, we’re about the data. We’re about what’s happening on a bigger scale. And one thing I’ve learned in my 25 plus years is that you can time some things, but you can’t time a lot of things. Sometimes you just have to take a calculated risk, and say, ‘Okay, well, based on what we know, here’s what we think the outcome is. And I hope that we get that mostly right.’
On the ‘mismatch’ between what buyers and sellers want for a senior living community:
I would love to say that I knew exactly what was driving this mismatch. There’s a lot of capital that’s been sitting on the sidelines, a lot of capital in the space that needs to be invested. We have a lot of properties that are leased up and some of them remained full during Covid. When I look at the check list of all the things that investors are looking for, I feel like I’ve got all these things. Why wouldn’t somebody want to pay top dollar for that?
I think the issue is, one, interest rates; which continues to work against us day after day. When we started marketing some of these projects, it was in a different operating environment than it ended up in and certainly that interest rate affected the price.
But I think the other piece is the uncertainty of it all. On an underwriting basis, buyers might have been more aggressive — or more realistic, in my book. Today, everybody is concerned about the what-if and everybody’s living their last biggest stress, which was occupancy loss, higher prices on food, higher wages. And we’re all trying to guess what that is. And so every institution has their own take on it as to how the guidance that they’re giving.
As an industry, we’re not aligned on what that guidance is at all from an industry perspective, from an operator perspective, from an investment perspective, even from a banking perspective. Pre-Covid, we were all pretty aligned on what stabilized occupancy was, what rent increases should be, what expensive increases should be, where we should be underwriting a deal and there weren’t a lot of adjustments. Today, we’re all making our best guesses, and that’s where that mismatch in price is coming up — [for example], if somebody’s being less conservative on rent and more conservative on the expense side. Again, we all just haven’t agreed on what that is, and I don’t know that we’ll ever reach agreement, because we all also get guidance from our companies, and the data that we’re reading from our portfolios today, that’s what we’re all reacting to.
At the end of the day, it’s a little bit of an underwriting challenge, because they’re going to take my numbers, and they’re gonna do whatever they want with them, whether I agree with it or not. And I used to be able to convince them to maybe change some stuff. I’m not having as much luck today as I had previously. And so I think that continues to shift. And then of course, interest rate uncertainty is obviously the biggest one, because as long-term debt becomes more expensive, the price has to be adjusted from somewhere.
On Ryan Cos.’ shift to high-end projects, and whether it might ever return to its original middle-market plans:
What drove that was construction costs. As construction costs rose, we had to find those markets where we could charge higher rents in order to get the margins that were necessary to hit the returns that we were expecting.
I greatly hope that someday, either rents will continue to rise to offset some of that in some of these smaller upper-middle or middle-income markets, that construction costs are lower or a combination of both. Then, we can get back to some of those markets, because they certainly have been some of our best-performing projects from an occupancy perspective, and a stabilized team perspective, because there’s less competition in those markets for executive directors and sales teams and the like. In senior living, a more stable team typically equates to success of a project.
Ryan Companies is diversified as an investment company, and I’m diversified geographically from a senior living perspective. And I love the fact that I can also be diversified from a product type perspective, which is part of why we work with multiple operators. We have multiple products and we can work in lots of different types of markets. And again, if we can afford to build a project that gets the returns in these smaller markets, it’s been very successful for us thus far. So I would love to be able to get back to it. But I need some relief on the construction cost side of things, which I hope is coming.
The other part of that equation is certainly the operating cost component. That continues to be a challenge as well, and I think it will be a very big challenge for us. I will love to see what innovation comes out of that, because there will be people who figure out how we make that work.
I’m very anxious to see because I’m very concerned that that market will not be served. And in my mind, your income shouldn’t dictate whether you get to have a great quality of life in the last part of your life, because I truly believe senior living is the best place for most people and hate that it would be inaccessible simply because of the costs. But right now, it’s a real challenge.
I applaud all of those operators who are really digging in to see how we change our operating models, and we do things more efficiently or differently; build a better mousetrap or a different mousetrap in an effort to solve that equation.
Technology is going to play a piece in this, but I’m not techno-savvy enough by any means to know what that’s going to look like. And I think we’ve just barely started down that journey. Covid really forced us to pay attention to it as an industry. And we’ve been sort of ignoring that for quite a few years.
I think building efficiency is going to play a large part. And I think there are two components. One is, from an apartment perspective, we’ve got to get smarter about the appropriate size of an apartment for the smart debt. How can we convince our future residents that that works for them? And how do we create the vision for them to be able to say, ‘Yep, I can move into a 700 square foot apartment, I don’t need 950 square feet.’ I’m not even going to pretend I can crack that code.
What I can do is do plenty of data research about apartment sizes and success and look at our portfolio and see what has done well so I can approach from the building perspective.
We have such amenity rich buildings, which is amazing that we’re able to offer all of those services and all of those amenities to our residents. Can we do that more efficiently and double up on spaces, or rethink how we’re using spaces and how hallways are configured? In our business, a lot of it is dictated to us by state agencies. And so, are there certain things that are inefficient simply because of licensing regulation? And is there any opportunity to have those conversations with regulatory agencies?
The reality is we need people to take care of people at the end of the day. Whether you’re in Austin or whether you’re in Des Moines, Iowa, from a wage perspective, at the end of the day proportionately to your income, your margin looks the same. That’s the toughest part.
It’s a people business, and we’re successful because of the people that we hire in our communities. We can’t create more hours for them, we can’t create more days for them, so we have to create the efficiency piece around them to be successful and to want to keep working in this industry.
On NIC’s recent active adult report and what it means for the industry:
It’s great that senior living finally embraced active adult and admitted that we need to figure this out because if we don’t, somebody else will and somebody else gets to control the narrative.
It’s amazing that they did the research, and I applaud the amount of effort that that really went into pulling all of that together. This is really the first stepping stone of creating some more organization around a sector that has become a big deal in our world.
I believe that active adult will do nothing but help senior living in the long-term, because it has those conversations with people sooner, gets them used to the idea of leaving their home sooner and gets them used to living with people of their own age — and, perhaps more accepting of traditional senior living when the time comes. I’m excited that we as an industry have embraced it, because, again, some multifamily groups want to say active adult is multifamily and senior living wants to say it’s senior living. So, I’m thrilled we’re all now speaking a common language.
But just like senior living, nothing fits into a specific box sometimes. And so you’ll always, I think, have these nuanced products that come out, and I think it’s a great starting point for all of us — investors, lenders, operators, developers, all now having some commonality that we understand about this business, and having some historical context of what has been happening in this industry at a very rapid pace over the last five years.
When you look at the growth trajectory of this, really, it’s been the last three years that it just has taken off, during Covid. It has provided a great living opportunity and a great development model that is a little easier to get done; less expensive construction with less people to hire. So there is a whole lot about it right now that I think is very appealing to our industry that’s been struggling with all of those things for the last three years. And it does represent a huge opportunity. And as I said, it is something that Ryan Companies for 2023 is very focused on as far as part of our growth model.
On the road ahead for senior living development:
It’s a combination of both getting harder and getting easier, depending on what part we’re talking about. As I said, we were seeing some positive shifts in the construction side of things, both from a pricing perspective and from a supply chain perspective, which certainly has been one of our biggest challenges in our industry. So, I think we’ve got some opportunity on that side of the equation, and that we have a little bit more visibility. I’m encouraged that makes it a little bit easier for others to start perhaps getting back on the development side of things.
The thing that I can’t predict today is land sellers. And land sellers have continued to kind of hold firm on their values. And when is that going to change? What are the market opportunities in some of these smaller markets? For us, land prices certainly are part of the equation, we are starting to see some influence of interest rates, people who are land sellers are understanding things cost more, and so are a little bit more open to some of that discussion.
Probably my biggest concern is this labor piece, simply because we’re also not going to materialize the thousands of caregivers that we need in this industry, and that’s probably just in the state of Texas alone. So while wages may either flatline or have less than an increase in the coming months, visibility into where the workers coming from to work in our communities is my biggest concern. The workers that we need, and the qualified and dedicated people that work in our communities, will they continue to show up when there are job postings, and when we have opportunities in our communities? And that’s I think the hardest piece to predict. In
It’s been a hard industry for the last several years. And as you know, we’ve lost a lot of qualifying people that have moved on to other other things that were less hard. And I don’t blame them one bit. Will they come back? Or will we be able to attract new people? As part of our market in data analytics, we’ve really focused a lot on job growth types of jobs, the people, the employment, and the workforce in those cities.
The thing I love about my job is I get to work with multiple operators, and so I get to see a lot of great ideas. I get to see a lot of different platforms, and the best part about senior living is that, while we have this full population of people, we need to serve everybody who wants something different. And I think it’s my job to provide enough variety of products, and to find something that resonates with our future residents or even our today’s residents.
Not everybody wants to live in the same type of community, not everybody wants the same amenities. Not everybody wants a suburban location or an infill location. And as a senior living industry, we have such an opportunity to have such a wide variety of projects and offerings. That, to me, is the most exciting part of the next 10 years. And we’re really working with our operators today about what’s next and laying some groundwork about the next evolution of design. What is the next evolution of services? Where are the best places to be located? Who should we be partnering with from an amenities or services perspective? And are there other ways to accomplish things?
That doesn’t have innovation doesn’t happen overnight. But Ryan’s focused on not resting on what we have today, but how we are creating the next wave of what our residents are going to want.
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