In the future, active adult communities and health care providers will have a common goal in keeping residents healthy for as long as possible.
Those are the beliefs of Michael Joseph, founder and president of Clover Group. With 50 properties and more underway, the Williamsville, New York-based company is at the forefront of the red-hot active adult trend.
Joseph has nearly three decades of industry experience under his belt, and over the years, he’s taken the view that the future of the active adult sector lies partly in communities where residents have access to health care and preventive care. To that end, the company has over the years sought to collaborate with players on the health care and hospital side to keep older adults well. And Joseph believes the trend represents the product type’s future.
“The healthier a tenant is, the healthier a person is, the better they are to whatever health care provider, or insurer is providing to them,” Joseph said during a recent appearance on SHN+ TALKS. “We have a mutual goal of keeping our tenant as healthy as we could.”
All the while, Clover is in growth mode on the cusp of 2023 — although to Joseph, the company has always been in growth mode, given the future opportunity in demand for middle-market and active adult senior housing. The key to that growth, he said, is vertical integration.
“You’re not trying to build something and saying, ‘Well, maybe they’ll come’ — they’re there,” Joseph said. “It’s strong and I think that it’s only going to get stronger.”
We are pleased to share the recording and this transcript of the SHN+ TALKS conversation with SHN+ members. Read on to learn about:
— How active adult demand far outstrips current supply, and when that might change
— Joseph’s view on health care and active adult collaboration, and where the trend is headed in the future
— Clover’s growth plans in 2023 and beyond
[00:00:04] Tim Regan: Good afternoon everyone. I’m Tim Regan with Senior Housing News. We’re joined by Michael Joseph. Michael is the founder and president of Clover, which specializes in active adult communities.
Clover has 50 communities in its portfolio and the company has a development pipeline of seven more. They’re growing quickly. At the same time, active adult is a hot space and everyone seems to be interested in it.
Michael, I want to start with a state of play with things at Clover. I know you and I caught up a few weeks ago. I remember when we talked last, occupancy was pretty strong. Things seemed like they were moving in the right direction but I want to hear in your own words, how have things gone and what are you working on right now?
[00:01:39] Michael Joseph: Well, it’s great to be on. Thank you.
The market’s great. The occupancy is very high. Actually, I’m just looking at the newest report I got shoved on my desk today. Our portfolio across all the stabilized projects is 97.61% occupied.
We stayed at this level all the way through COVID. We stayed at this level all through 2008, 2009 all that. What’s interesting is I think you see that there is a demand-supply imbalance, and the imbalance is not getting tighter or is not closing. It’s getting worse the way I see it. The statistics that are quoted all the time, 10,000 baby boomers a week turn 65, and that’s a great number but the number you really got to focus on, to me, an active adult is the last 65-year-olds. I’m 63, I’m not moving into a senior housing project.
I still work and I think you’re finding that what you really want to look at is look to the 70s and into the early 80s because as we know, people today are in so much better shape than my grandparents would’ve been. Active adult to me spans such a long period that I would focus on the older part, frankly, because that’s more likely who’s looking to make change in their life. If you look at that, there’s a supply-demand imbalance, there just is. There’s more and more of those people, and there are not enough people building the product and that hasn’t changed.
It’s crazy but I’ve been doing this for almost 30 years and it hasn’t changed in 30 years. I keep waiting. I do, I keep waiting to go into a new city and find out, no, we can’t go in that city because company X, Y, Z is already locked up or they’ve done it and we don’t. There’s challenges of why, but the strength of the demand to me is normally what would drive an industry to grow. You’re not trying to build something and saying, “Well, maybe they’ll come.” They’re there. It’s strong and I think that it’s only going to get stronger.
[00:04:07] Tim: Can you describe the Clover model for our audience, maybe tell us about a typical Clover community in terms of units and amenities?
[00:04:25] Michael: What we’ve specialized in from the beginning is the middle-income active adult. Middle income obviously would vary city to city. Frankly, we don’t look at cities as cities. We look at cities as a bunch of municipalities because we all know you have rich suburbs, poor suburbs and so middle income will be different in each of those. We’ve always focused on the middle income. Typical Clover buildings run 120 units. They’re all what I call infill projects where we want to go build where the people live. We’re not trying to get seniors to move.
If you live on the north side of a city your whole life, we’re not going to go build on the south side and think you’re going to want to move from north to south, because you just lost your friends. You lost where you shop, you lost what you were comfortable with. Because of that, we can’t really build big giant projects because what we’re trying to do is infill into each of these communities. And a typical building will be mostly two-bedroom apartments.
We found through the years of trial and error, certainly if you go back 25, 30 years ago, where we were lurching from one to another because there was nobody doing it and we were just guessing, that two bedrooms is really what people want. They want their own bedroom and then they want a guest room/den. Just leave a little more space and they’re willing to pay for it. Clover buildings will have community spaces.
When you walk into our buildings, we call it the living room. It’s not foyer because it’s got a fireplace and chair and couches and stuff where you can sit and people can hang out. Then we have a very large community room. Then we have a gym and we have other spaces where people can get together. In the old days, we had libraries. Literally, we would fill bookcases with books. Everyone has iPads or Kindles these days, so they’re not really looking for books.
We don’t provide any services. These are apartments for people who are independent. We don’t provide food. That’s where you’re going to see the industry starting to change a little bit, I think, over time, not as to who provides it but that’s a typical Clover product. We help our tenants organize a very robust social activity list.
Our buildings are single buildings, elevator buildings. They’re three and four stories and so everything’s self-contained. We have primarily built in cold weather or moderate where they do still get cold. They’re enclosed buildings. That’s really what we built. We’ve stayed true to that. If I took you to the first building that we built almost 30 years ago, and I took you to the newest building, I won’t tell you the newest building isn’t nicer and that the finishes aren’t better, but the general idea of the building has not changed.
[00:07:33] Tim: I want to break out some of that demand that we just talked about. I remember when we talked last month, you had said the more the merrier. It sounds like you still feel that way a few weeks later. What do you see as the demand for this?
[00:08:04] Michael: Sure. The way that I approached it from the beginning is, let’s break out the difference between cities that had tremendous run-ups in real estate and those that did not over a 20- 30-year period. Here’s an example:If you had someone who bought a house on Long Island in 1960, and you look at someone who bought a house in Buffalo in 1960. Fast forward to 25 years ago, which would be 1997, the house in Long Island had gone from $14,000 or $20,000 to $600,000. The house in Buffalo had gone from $15,000 or $20,000 to $200,000.
The person in Long Island could sell their house, move to Florida, buy a nice place, and put a few bucks in the bank. The person from Buffalo couldn’t even sell their house in Buffalo at that point, and then moved to Florida to find equivalent housing to live in. We started out the concept with these people who were, I won’t say trapped, but they didn’t have the same options. We wanted to provide housing for them. Fast forward 25 years now, and what you’ve got is, there are so many seniors who just don’t want to leave their communities. It’s no longer a fact that they can or cannot, plus the Buffalos have caught up in the world.
Now, the person from Buffalo could sell and move to Florida, but they don’t want to because they’re active. They’re not looking to retire and just go sit and play shuffleboard or play golf every day and all day. That’s the biggest change that I’ve seen.
When you ask me about demand, I think demand grows every week and the supply is not growing every week. I believe that there is a lot of room here for a whole lot of players all over the place to get involved and in the same cities even. Cleveland is not one city, there’s a lot of parts to Cleveland. You could be developing the east side, I could be developing the west side. Somebody else could be developing the south side.
In Buffalo, where we’ve got the longest history, there are probably 10 people who’ve built senior properties in Buffalo and not just one. We’ve got one guy in the Buffalo area who started specializing in 15 and 16-unit buildings, infill sites. I think he’s built eight or nine of those already, now he’s built some big ones. I haven’t changed. I think there’s a lot of opportunity and a lot of room for a lot of players.
[00:11:12] Tim: You talked about this inflection point earlier. You keep waiting for the year in which people wake up to this. I will say, at the NIC conference this year, it did seem like active adult was on the lips of more people than I can ever remember. I am curious, do you think we’re getting close to that inflection point? Do you think maybe 2023, 2024 might be the years where this could really blow up?
[00:11:47] Michael: I think that what you’re finding is serious interest from both the institutional investment world and then the multi-family developer world who’s looking around and saying, “What else can I do? We’ve had a great [deal of success] running multifamily, but if housing prices are going to come down, all of a sudden apartments become less attractive. We’re going into a recession, it becomes a little tougher.”
When you combine those two, you get a lot of people who are interested and you look at our occupancy rates and you look at our lease-up rates. I do think that you’re seeing the beginning, but the ultimate problem is going to be that it’s not as easy to do as I like to say.
To me, I get my own people, we build them, they lease themselves. What’s the big deal about building them? You might be able to go to the high end, although they’re getting squeezed too now because of construction costs. Being vertically integrated is what you need to do if you’re going to succeed in this.
Even the leasing of it or the operation is different from regular apartments. I want to tell you a funny story. I was talking to a guy who builds multifamily apartments and he built a senior project and he said, “We’re having all kinds of problems.” I said, “What is it?” He goes, “Well, these people come in, they don’t rent.” I said, “Well, what do you mean they come and they don’t rent?” He goes, “They come in, they spend 45 minutes an hour in an apartment and then they leave.”
I said, “Okay, because they’re going to come back five or four times. They’re going to come back with each of their children and their best friend. This is an end of a life decision because they don’t really expect to ever move again. They’re very cautious.” I said, “No, it does not lease like what you’re used to where someone comes in and you make a deal on the spot, it’s different.” Not only is the whole lease up different, anybody in the industry knows this, managing them is different.
Your managers are more social directors and leasers than they are rent collectors because the rent comes in, these seniors pay the rent.
When you start to put this all together in the construction, you’ve got to watch your costs. You can’t have too many middle people, everybody’s got to make money and it gets expensive and your margins get killed. When you put it all together especially in the world we’re in today with rising interest rates, costs have skyrocketed, it clearly has made it more difficult to enter the industry which is also about why those who are in the industry have gotten incredible valuations on their properties because money’s now starting to chase the product and there’s not enough product.
It’s a weird place because you and I would sit and say, “Everybody should be doing this. Look at this. They’re paying ridiculous cap rates in their lease and they’re sticky, much stickier tenants. You turn 20%, 25% of a building, not 50%, 60% of a building.” Oh, you’re right, but it’s a challenge to find the property because everyone’s got the same issue as I do. You can’t just build a 300-unit senior project on the south side of town because that’s where everybody’s apartments are. You have got to control your cost, you have got to know how to lease them, you have got to know how to operate them. It’s challenging, but I do believe that it’s not magic, so people can do it.
[00:15:14] Tim: I’m glad that you just mentioned some of the challenges. That was actually going to be my next question — why aren’t more people doing this?
I want to ask you about the acuity of active adult residents. In my mind, it makes logical sense that someone would see the cost of active adult, they would see the cost of independent living, and they would say to themselves, “I’m going to try to live in this active adult community as long as I possibly can possibly stripping my care needs, but this is the setting that I can afford, therefore this is where I’m going to stay.”
It’s also called acuity creep. You told me that this is not really a problem, it’s not something that you’re really worried about. Can you talk about why that is and what happens when people age in these properties?
[00:16:36] Michael: Sure. What we’ve found through the years is that clearly our tenants are aging in place. We get very healthy tenants who come in, who are independent, and of course, if they come in at 75 years old and they stay 8 years, 9 years, they’re in their early ’80s. We all know that there tends to be a lot of change as you cross that 80-year-old, for most people, that the physical things just start to change. The body starts to degrade, hopefully the mind doesn’t.
What started to happen is, there are parts of the industry that start to fill this need. In the old days, Meals on Wheels would come and people could order meals and get them delivered. Now there’s more sophisticated follow-ups to that, but it’s the same concept. It hasn’t really changed yet. We had visiting nurses where you could hire a nurse who would come to make sure that your mom, your dad, were taking their medications. They would check on them and know what to do and really give them more of a, looking at them that you can’t do as a layperson, but that they can. They can take their blood pressure, they could do similar things to make sure that they’re doing okay because we don’t provide that. Those existed and were growing.
What we’re finding now is the level and amount of those services are growing because people are saying, “Whoa, we have got all these seniors all over the place. There’s a business here, and we can provide this, and the landlord doesn’t have to.” I think that will help and is helping people age in place, no doubt about it, and stay longer than they did before. Even with all that, we still find that the tenants stay until those needs are just not able to be serviced in any way, and then they move on to the next level.
We don’t find them going to independent living. What we find is they stay until they’re going to nursing or dying. We do have a regular amount of people who die in the properties. They’re older and they’re healthy, but healthy people die, unfortunately. That’s what we see.
I know that the people are very concerned about acuity and where people just age and become somehow an expense to the property owner and what will that do. We haven’t seen that. We’ve got something like 6,000 tenants. We have got a lot of people to watch and we’ve got a lot of history to look at, and we’re really not seeing a big change in that. I suppose that’s a good thing.
[00:19:25] Tim: Absolutely. Something else that I’m very curious about, are the kinds of models that companies are coming to market with. I’ve heard many people say food should not be included in active adult. Some others think it should be. The reason I’m bringing all this up, is it just seems like there’s a few different ideas about what this should look like in the future. I’m curious, what is your view on what this model should include and maybe what it should not include?
[00:20:34] Michael: I think price has a lot to do with that. If you’re going to go to the real high end of the marketplace and that’s where you want to be, then you’re going to have to offer more services and more things than the low end has to offer. You talk about food. If I’m going to operate a super expensive senior active adult community, then probably some restaurant option there is something people are going to want. if I use Florida as an example, in the golf communities, where frankly the clubhouses are like resorts.
They have multiple pools and buildings and gyms and four or five restaurants and because the people in the community demand that they want to live in that community and part of living there is they don’t want to cook or not all the time. I could see that at the high end to some degree. For the rest of it, I don’t see how food works. I don’t know how you make any money at it. I think it becomes a big cost item. It requires intense capital investment to start, capital to manage it, you’ve got people. Who’s cooking? How are you doing? Are you sourcing it out? Are you doing it yourself? Now you’re morphing towards the independent living model.
I think that as soon as you start on that track, your profile starts to change and then you start to get into conflict, which is what you really want to stay out of. What’s active adult and what isn’t active adult? Active adult, to me, is someone who can live on their own, feed themselves, clothe themselves, take their medicine, go out — all independent. They don’t need anybody to help them with any of that.
Yes, you can tell me that they don’t want to cook anymore so they use some food service, but they still can. They still go in the kitchen. Soon as you start morphing away from that, the higher levels, I think you’re moving out of active adult. When it comes to food, when it comes to any medical, I think that’s not active adult and I think that’s where you’ve moved out.
[00:22:49] Tim: I want to get your take on another model that I’ve seen, which is developing space for places where people might be able to buy things like food, but not restaurants.
I’ll give you an example. There are some operators or at least one that I can think of that is trying to incorporate a food hall component into their active adult communities; essentially a wide-open space with a bunch of stalls or stops where different vendors can sell services or goods. Obviously, that seems like it would add to the cost of a project and that itself sounds complicated, but do you see a place for those kinds of things in active adult as well?
[00:23:48] Michael: I suppose if you had enough people, but then you’re talking about a big project or where the active adult’s a component in a bigger project. I don’t know how an active adult project on its own could support that. I have trouble. Now we’ve played with the idea, for example, of there’s a company that will come in and put in hot and cold units. I don’t know how to describe, and so where tenants can actually order. We don’t do it, but they order. You would order, let’s say for dinner you want something cold, a pastrami sandwich, and it would just be delivered, and then be in this cabinet in the community room and you would go down and you’d have some ability to access it and take your food. I can see that, but that to me, again, is a third-party vendor that’s figured out a way to deliver to your tenants where the landlord doesn’t have any responsibility. You’re not in charge of it. You say to your tenants, “Don’t call me if there’s a problem because I’m not providing the food but we like this provider.” Now, of course, as you’re the landlord, you’re always going to get the blame if there’s a problem.
When you’re talking about health services, we’ve looked at combining with or doing some kind of joint ventures with some of the health and hospital chains, or things like that. The rationale there makes more sense. The healthier we can keep our tenants, the longer we can keep our tenants. As a landlord, I want healthy tenants. The healthier a tenant is, the healthier a person is, the better they are to whatever health care provider or insurer, is providing to them. We have a mutual goal of keeping our tenant as healthy as we could.
There, if you can combine things with the housing and the health services, I think it’s a natural to go together, I do. I think that just works and anything you can do to incentivize your tenants, simple little things like, “Mrs. Smith, did you get a checkup this year?” “No, I really didn’t.” If a checkup was right there, or across the parking lot, Mrs. Smith is going to go get a checkup. If Mrs. Smith came to the checkup, we’re given the early opportunity to see if there’s something going on with Mrs. Smith that now we can monitor this, or we can fix this early. I do think that is absolutely see that as the future.
[00:26:23] Tim: We have a question from our audience. The question is something I think that senior living operators do have to struggle with quite a bit. What do you do when a resident runs out of money? In the senior living world, I think it’s very tough. People need care, people are very embedded in their communities, that’s a really disruptive process when they have to leave.
You said earlier though, your residents really don’t have trouble paying their rent, your rent collection seems really high. Obviously, I’m sure you do have these situations but can you talk about that at all and help answer this audience question?
[00:26:59] Michael: Because we concentrate on the middle class, a good chunk of their income is their Social Security. It comes every month. They really don’t run out of money in that regard. We include everything in our rents. It includes all utilities, it includes internet. They know if they can just pay this amount per month, everything is included, they need to live. The money is not an issue because of that.
Social Security goes up. Inflation’s crazy when Social Security is at 9%. Our tenants are getting income increases that follow along with what’s going on in the world. It would be more of an issue for more expensive units where Social Security becomes less and less a part of the full amount they have to pay. To cut to the chase, if you can’t pay, we evict you.
[00:28:00] Tim: Which is the same for any multifamily apartment that they would live in as well.
[00:28:05] Michael: Exactly right.
[00:28:07] Tim: It really does seem like interest among capital providers, investors, it seems like they’ve really become interested in investing specifically in active adult. I know that you have some partners that are very big on this. Have you sensed in the last year or two years that there’s become a lot more interest in the product type? Tell me more about the interest as you see it from those parties in active adult.
[00:28:43] Michael: The answer to that question is substantially more interest. I’ll tell you one of the biggest changes. If you went to three, four years ago, if I was out trying to raise money, and went to the institutional world. I have heard a lot of pushback saying, “Well, you’re not apartments, you’re not senior housing, the way we think of senior housing. You’re a specialty real estate, and so you have to talk to our specialty real estate group.” Okay, great. Then you go talk to those people: “Well, I don’t really understand what you’re doing. How does it hold?” I would say, “Look, I can give you 20-plus years of operating histories. You’re going to be blown away by what you see.” “Well, it’s not exactly what we’re interested in.”
Alright. You don’t waste your time, you go find where there’s money and you go to the money that’s easier to find. Somewhere in the last two years, the institutional world started to look at this and say, “This really fits core funds, because core funds, we really have to lock in a spread. We have to have pretty good certainty on what the return is going to be. Wow, we really can look at a 20, 25-year history and see that they stayed over 95% occupied for 25 years. That’s really steady. That gives us the comfort to know that through good times and bad times, recessions,” and the whole thing.
Cap rates started to drop dramatically for active adult, especially for middle-income active adult. It’s not hard to understand. They didn’t want to, they didn’t need to. Once they looked at it, we found our cap rates compressing down to the best cap rates people were getting for apartments.
We were all of a sudden, four caps and four could be prior to this big rise in interest rates. I’m not sure anyone knows where cap rates are right now. That was a big change. Also with that change came more institutions looking and saying, “Well, that does make sense, and institution A did it and we’d like to see what they do.” There was this tremendous growth in the institutional money that now wants to invest in this space. I get calls all the time now, from people saying, “Hey, are you looking for an institutional partner?”
My answer is always, “Well, I’ve have two.” “Well, things can change.” When you start hearing that, you know that the institutional world has woken up and said, “Wow, we really need to look at this and we really need to have some of this.” I believe you will start to see every major institutional investor that does real estate start to stake, try and acquire, as you say, stake a claim, but acquire active adult, they will.
[00:31:45] Tim: This leads me to something else I’ve wondered about and thought for a while, which is obviously the need for middle-market senior living. I can see how active adult communities might just settle into being the middle-market communities, given the price compared to senior living. What do you think of that?
[00:32:52] Michael: Look, there’s always going to be rich people who are wealthier people who can afford to pay for whatever they want. Those communities will always be there. Yes, I think your point’s an interesting one, where you have compression in the marketplace because of costs. I tend to believe that there will always be different products available for different income levels, I do. I think that’s where the industry’s really going to have to figure itself out. We know the low-income, because we’ve had those tax credit deals, so we know what can be done and communities are focused on it now. And there’s government money. We know that that will be a growing part of the world.
As people focus on it, as we continue to age, it will become an issue for America. I won’t speak to other countries, but they’re going to have the same issues. I think that the middle-income is the majority of the people. If you just look at it statistically, middle income is the majority. I do think that ultimately this is the product, and I say mine exactly, that a lot of seniors are going to live in, it is. Just because it’s aimed at their income and their income is the majority of the seniors as they age. It’s a statistical reason it will, not because it’s something special or that, it just becomes a product of the world that we live in and what’s happening.
[00:34:34] Tim: Yes, I think the data bears that out.
You’ve been doing this a long time, three decades. We have a senior living industry that’s, I think, trying to get all of the tips where they can, trying to look at other industries and other product types to try to maybe weave some of those ideas into what they’re doing.
Given that you have all these decades of experience, whether someone is looking for an active adult project or whether someone is looking to maybe improve what they’re doing on the senior living side, do you have any advice or hard lessons learned that would apply to a broad part of the market?
[00:35:42] Michael: I believe that operators in the traditional senior world should also be looking to add a component of active adult.
I think where they have to watch out is the active adult they add has to fit with who they have as tenants. I think that’s where it gets harder to really focus because someone says, “Oh, you got to do active adult.” They say, “Okay, great, and we’re going to build this fancy building and we’re going to get this.” Well, but is that your tenant? Is that who you have throughout the whole place? If it isn’t, that’s the wrong product.
The other part that’s interesting is we find that active adults do not want to see their future in their face all the time. I know that someday I may not be so mobile. We know that this stuff is coming. Part of what makes it interesting is how you place this product on your campus in a way that those tenants do not see that.
Interestingly, years and years ago, there was a community in the Buffalo area that was like a CCRC, but not. You didn’t buy in, but it had every aspect of a CCRC. You could go, and they would basically tell you, “Look, you move in here, your mother moves in here, she’s never going to leave here. We have every chair from regular apartments all the way to full nursing care, to memory care.”
They approached me one time and said, “Listen, we’d like to put one of your projects on our site. We need a joint venture. What do you think?” What I just said is what I thought. They said, “Well, take a look at our campus and see if you can find a location that you think would work.” We built one, and it was really successful.
Ultimately, that CCRC-like place was selling. We had to sell the building, which really, I didn’t want to do, but the idea worked really well because you could still sell the idea to an active adult that, “Hey, you’re here. You don’t even see what’s going on over there, but if you need it, it’s there.” I think that’s what my advice would be to the operators of senior housing, what we think of as traditional senior housing. They don’t have to do it themselves. They can partner. They can partner with people who understand this particular part of the industry because it is way different than what they’re used to dealing with.
[00:38:41] Tim: That all makes a lot of sense to me. I want to actually talk with you about something else. I think we’ve talked around this one again throughout our discussion today, and this is a topic that I feel like is a will they, won’t they type thing, but a recession we keep hearing about whether or not that’s on the horizon. I still think that the jury is out, although as of late I still hear the rumblings, especially with interest rates where they are.
Obviously, it seems like there could be a downturn ahead. With any downturn, I think there’s a possibility of home prices falling. Based on what we’ve talked about, it doesn’t sound like you’re that worried about what would happen in a downturn. Can you talk about why that is and what might happen to the active adult sector and to Clover if there is a recession on the horizon?
[00:39:49] Michael: We’ve lived through them before. First, the good news for us is our construction costs will come down. Building the new ones will become cheaper. That would be a welcome change to what’s happened over the last few years. The demand won’t go away because people are aging. The reasons they move today won’t change. Sure, they sell their houses, but think about how most of them aren’t selling their houses because they all of a sudden wake up one day and say, “I hate my house.” What happens is, they age out of their house, either financially, or physically, or both, I suppose.
They have a two storey house, they’re living on the first floor because they can’t manage the stairs, really. It’s hard to get in and out and so physically, it becomes an issue. They’re isolated. They can’t see people because even though they’re independent and they’re active, that’s still to get out of the house to come down to get my car to go to the senior center, let’s say, versus a friend’s house. Then financially, they typically live in older houses that have a lot of capital improvement needs.
A roof leak is a major thing if you’re on a fixed income. Anything else with the house. Then they have kids, a lot of them who are saying, “Mom, Dad, I don’t like you living there. I’m not comfortable with you there by yourself anymore. You could fall down and we would never know if anything’s wrong, there’s nobody around.” When you combine all of those, the demand won’t go away. What will happen is, now remember, we’re rental housing so you don’t need any cash to come in.
You can sell your house for $400,000, you can sell your house for $200,000, it’s irrelevant, to me, it’s only relevant to how much of that money you need to earn income on to live above your Social Security. Yes, prices can come down. People will sell. Typically, though, it’s really interesting and I think this is fascinating. A lot of where these seniors live today is where the young couples want to go to live, the young families, because it’s the affordable neighborhoods.
Typically these neighborhoods were nice neighborhoods. They haven’t really changed and become bad neighborhoods and the schools are good in a lot of those suburbs where these people are. So, you’re seeing it coming down, they’re going to come down. You can’t have the run we’ve had the last 8 years, 10 years, whatever it’s been, and not see it come down. But I don’t really think that that will affect this part of the industry. It will affect the people who need cash to buy into those separate communities, if they have less cash, I could see that. I don’t see it with the active adult. I don’t.
[00:42:43] Tim: What do you sense that the baby boomers are going to want out of these communities as they start to move in? Obviously, you’re still dealing with folks that are older than that generation, I think you said higher 70s and lower 80s still. But what do you think the boomer is going to want?
[00:43:25] Michael: Well, those are the boomers now, right?
[00:43:27] Tim: Oh yes, I suppose you’re right.
[00:43:29] Michael: I was born in ’59. ‘60 was last year for the boomers, I think. You have had 62 years since the youngest baby boomers. The oldest ones are in their 70s. What they want is, they want more technology because they’re more technologically adept. They want more intellectual activities and they use the gyms more.
Today, no, you have got to build the gym. You have got to have ellipticals and all that kind of stuff. I think that those are the places you’ll see where the changes are, is any way to accommodate, you just adjust for it. Look, I can’t predict the future and never could — never tried to. What I did from day one though, in designing our first building was designing enough community spaces that I didn’t know what the future would be but I wanted to make sure we had space for the future.
You have to have the infrastructure in the buildings so that everybody has internet and high-speed internet and things like that because that’s where the world is. You just keep looking forward and try and catch the trends before they become big so that you can get ahead of it.
We’re always trying to find something that we can offer that other people aren’t, that makes our properties more attractive to the baby boomers. I’ll give you another example. People work out with the mirror, so you may see buildings where there’s a mirror in every apartment. Why? Because that’s an amenity that is being used by the boomers because boomers are still working out and things like that. I think that’s the stuff you have got to look for.
[00:45:45] Tim: What are some of the must-haves that you see in the tech world? Obviously, the infrastructure to support high-speed wireless internet, that seems like a given to me. Are there other ways that you build this into a community and how do you make it work in that middle-income model?
[00:46:24] Michael: Well, so far, really the key’s been high-speed internet and we include it in the rent. People are not paying for the internet access, they’re not paying for any of that. They like that because then they can go on, it’s not an additional expense and then they feel okay. I don’t really know. I really believe what I said before, like the mirror is going to be something, I do. You have a stove, you have a refrigerator, where’s my mirror?
What kind of workout classes do you have? Do you have any workout classes here? I know there’s a gym. Is there a trainer around? Do you have access to a trainer? I think some of it’s more low-tech than high-tech, frankly. High tech’s hard for me to predict, because it’s very hard for me to see seniors being part of that in a big way.
Most people of my generation want to be with people. Even my kids who are in their 30s, they want to be with people. Maybe the day will come where everyone just wants to put on a pair of [VR] glasses and be in a fake world with people. I don’t know. Maybe that will be our world. I don’t see it in the near-term.
I don’t have any great vision I can share with you and say, “Oh, this is where it’s going to go and this is what we believe.” We just see how people live and then try to react to that and try and look. We look to see what we think of these things as you read about them. Cars, we’re going to have to start to have, and we’re planning out to have charging stations at our properties, when we could have thought of that a few years ago. As we get younger baby boomers, no. The younger baby boomers as they age, we have electric cars, more environmentally engaged and so we’ve got to start to accommodate for that. That costs money.
All of this costs money. However, I think if you can, for the most part, when you’re building a building it’s a lot cheaper to add things than it is later to try and retrofit them. We try and make sure that we have buildings that are built to allow us to add things that don’t cost us a lot to add because we’ve allowed the room and we’re not trying to find a chase that doesn’t exist to run wires for this new idea. No, we make sure we have chases that go everywhere so that we can run wires easily, things like that.
[00:49:02] Tim: Here’s a question from our audience and this is something that everyone’s been focused on. They want know if you’d be willing to share what percentage of rental rate increase you have budgeted for 2023.
[00:49:29] Michael: 12% on renewals, 20% on turns. Numbers, I never thought I’d see.
[00:49:34] Tim: We’re standing at the precipice of a new year, 2023. What are your strategic goals next year? What do you think you’ll be focusing on? No one has a crystal ball, but what are you preparing for?
[00:50:16] Michael: For us, we look at a recession as an opportunity. We are trying to do more deals than we’ve ever done, new projects. We close this year on seven properties where we started construction on seven new projects. Our goal for next year is trying to be closer to 10, and that’s what we’re trying to do. I think the future is really bright and I want to build as much as I can.
The hard part is finding land. That is the hardest part. The hardest part for most people but in our case, because we really have to find infill sites, it limits us even more. I can’t go to a new city and say, “Oh look, all the new apartments are being built on the south side. Great, let’s go over there and find all the land zoned already.” It’s more expensive, but it’s zoned, it’s ready.
Now, we’ve got to go to each place we want to go and find a piece of dirt, rezone it almost every time, fight the battles on a rezoning. That’s the challenge but that’s the opportunity because if we can do it, we keep doing what we do well and it allows us to grow as quickly as we can. I think that’s really for Clover.
Clover’s in a growth mode. Clover’s been in a growth mode for the last 25 years. We’re just growing a little faster now and enjoying it, it’s great. I never thought that you go into a business because you’re going to make money at it, at least someone like me does. I know that’s not how everybody enters. The fact that I can make money and provide quality housing for people who are ignored by the majority of the development world is one of those just double feel-goods. It’s a nice thing, it’s great. We want to do as much of it as we can.
[00:52:10] Tim: You talked about an opportunity ahead. Do you see any challenges? If so, what do you see?
[00:52:18] Michael: Challenges are clearly on the construction side, challenges are costs, labor costs. Not just for cost, getting labor even if you want to pay finding the subs. When you go to a new city, for us, it’s really easy if it’s a city we’re active in because people know us and they know that I can come to you. If you were an electrician and I came to you and said, “Look, I want you to do my buildings. I need you to work at this price,” and you might look at me and say, “No, I can’t make enough money.” I said, “Yes, but I’m going to build eight projects in this city over the next three years. I’ll give you all the business.” You start to look at me as your cash flow, not your profit. All of a sudden you get a different response.
When you come in that first time though, it’s hard because you have got to find your subs, and they’re all busy and there aren’t enough of them anymore. I think that a big challenge is going to be the construction cost. Oil goes up, everything petroleum-related goes up. Lumber comes down, but everything else is going up. Inflation’s running high, labor costs are running high. Challenge is to control our cost. Flip side is if inflation stays up, rents go up. If you maintain that spread, you can keep increasing the value and the deals work. That’s the real challenge. The real challenge is going to be the cost of development versus rents. Interestingly, most communities have changed.
We used to fight going into a community and they didn’t want us. “Oh seniors, we don’t need seniors.” Now most communities realize they do need senior housing. They welcome senior housing and they actually will work with you pretty good on sites and getting rezonings. The neighbors don’t fight so much because they’ve begun to realize that we pay taxes and we don’t really use many services. We’re paying school taxes for your kids and no one in this building is going to school. I think that part of the world’s easier, but development’s never easy, as we all know.
[00:54:14] Tim: I want to actually go back to something that we talked about earlier, and I want to ask you about this.
You talked about CCRCs and active adult. I have heard some CCRCs actually say, “We actually see assisted living as the end of our care continuum, whereas before it was skilled nursing. And we actually think that active adult can go at the front of our care continuum.” Do you think that’s a trend that will continue? Are you seeing more of that where an active adult community becomes the new entrance into senior housing?
[00:55:17] Michael: I see a little bit of it and I think you’re going to see a lot of it. It makes sense to me. It’s the logical place for people to enter. The key is going to be making it a place they want to live, that they feel comfortable, coming in healthy and active, and don’t see constantly what unhealthy and inactive looks like. Yes, I do. I think you’re going to see more and more of it. I do believe that’s the future.
Standalones will be there, don’t get me wrong. But I can see buildings on the grounds of hospitals, for the same reason — that they have more access to get to the tennis to keep them healthy because they don’t want them in their emergency rooms, as we all know. I think you’re going to see a lot of that over time. It will take time because it’s not a business they’re used to and it’s not one that a lot of them understand but they’ll get there.
[00:56:14] Tim:. Do you have any thoughts about the name active adult, and whether that needs to evolve into something else?
[00:56:42] Michael: It’s interesting to say it because to me, we used to define ourselves as independent living. That’s how we looked at it. Independent, to us that meant, no, you don’t need any help, you’re independent. Somehow, the industry has morphed independent living to be what used to be assisted living. I think the industry’s done it to itself in a certain sense. Active adult to me defines people who are independent living, who don’t need help. They feed themselves, they clothe themselves, like I said before, I don’t want to repeat myself, but that’s what I think active adult is.
I don’t think it’s complicated if you just keep it very simple. As soon as you start having services to help people to live, it’s no longer active adult. It may be a quasi-active adult. It may be a combination of active adult, independent living, but it’s not just active adult. I think people when they go to an active adult project, they know it’s active adult, whether it’s high end, middle end, you know it because you walk into a building and there’s cars in the parking lot. Guess who’s driving the cars? Old people.
That’s who’s driving the cars, it’s not their kids, it’s not their aides, it’s the people. You go inside and who’s sitting around? It’s the same people. They’re talking and they’re getting their mail and they’re in the community room. If it walks like a duck, quacks like a duck, it’s probably a duck. I think that active adult is a little bit like that.
[00:58:07] Tim: We have maybe a little bit more than a minute left here. Not quite enough time to ask you another question and get into a topic, but I did want to give you an opportunity if there’s anything else you wanted to tout or say or leave us with. I’ll give you the last word and then we’ll wrap up.
[00:58:23] Michael: My last word would be that we have a responsibility to look forward and take care of the seniors of America, and that all different aspects of housing are going to be needed. Lots of people are going to have to get involved with it. It’s for the good of those of us who do it and the good of the people who are tenants. Everybody wins in this one. That’s what we need. We need lots of people. You’re right, I said lots of people should get in this, can get in it, they should get in it for both reasons. Make money and do good for the community.
[00:58:56] Tim: Those are great words to end on. I just want to, again, thank you, Michael Joseph, and Clover for a great discussion today. Of course, as always, thanks to our viewers for tuning in. I will be back with another SHN+ Talks after Thanksgiving. For now, Michael, thank you again. This was great.
[00:59:19] Michael: Thanks so much. Have a good one.
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