Headwaters Group is moving full steam ahead with a middle-market active adult growth strategy, and active adult operations giant Greystar slated to manage the company’s properties.
Currently, the Denver-based real estate owner and developer has four development sites under control in Colorado and one in Arizona. The company also is a co-sponsor on an acquisition in the Salt Lake City region. And there is more growth on the horizon beyond that.
As he honed the company’s growth strategy over the last 12 months, Headwaters Managing Partner Ben Burke thought long and hard about whether the company should self-manage communities or bring in another company to do so. Burke — who helped build a vertically integrated operating company in his previous role as president of Anthology Senior Living — is a firm believer that companies seeking growth must also be sticklers for minute details in operations.
But, he eventually landed on the belief that certain multifamily operators can be the right kinds of companies to manage active adult communities, provided they have the right scale and senior living sales and marketing expertise.
With around $4 billion worth of active adult assets under management representing more than 23,300 units globally, Greystar had the size and sophistication to fit that bill.
Choosing to go with an experienced third-party multifamily operator over the self-managing route was a “seminal moment” and a “big deal” for the new company, he said. And as it grows, Headwaters is creating a blueprint that other companies forging ahead in the space may choose to follow.
“Multifamily operating managers, they are so sophisticated when it comes to revenue management; when it comes to expense control; when it comes to sales and marketing,” Burke told Senior Housing News. “Those are the reasons that we decided … that style of management company was the right group for us and for our projects.”
Middle-market active adult strategy
Underpinning Headwaters’ growth strategy is a belief that active adult communities with rates attainable to the widest swath of older adults will be well-positioned as the baby boomers age into their so-called retirement years.
Burke told SHN the company is targeting monthly rates in the low- to mid-$2,000 range. And the company’s communities will have larger units to better accommodate older adults who are downsizing. Headwaters is currently planning to grow by a rate of about four to six developments and about two to four acquisitions per year.
Burke added the company is looking to grow in “dense, second-ring suburbs of cities in the western half of the U.S.” The company is not as interested in growing in urban areas, he added.
Locating near more traditional senior living communities is a “very healthy, dynamic” for active adult, and Burke sees the potential for synergy between active adult and more traditional senior housing communities.
[We’re looking for] both a large number of seniors who have lived there for a long time and adult children who are raising families for whom the senior may move closer to,” Burke said.
In addition to larger units, Headwaters communities are also planned to have clubhouses with rooms for gym and yoga, art puzzles and card games, and to gather for events or happy hours.
Like many other active adult rental communities, Headwaters’ will not carry a long list of in-house services for residents or charge all-inclusive rates.
“We want to focus very much on our wellness activities and other programs that promote socialization, which make people really enjoy living there,” he said. “Beyond that, we don’t think that there is a place for all those other add ons.”
Burke said the company’s top goal in 2023 is to continue to build brand awareness, and “embrace the essence of what we’re offering and what makes us different.”
“From the markets that we select, to the products that we sell, to the communities we design, to the rents that we choose, to the size of our units, to the amenity spaces — we really want to be very tight on that, because that will help lead us,” Burke said. “We want to continue to make ourselves smarter, better and with more research into who our customer is, who our competitors are, what people are doing well, what’s working and what isn’t working.”
‘Harder than it looks’
Any senior housing company that has even only dabbled in active adult can tell you the product type seems deceivingly easy. And with expected margins as high as in the 50% to 60% range, it is an alluring product type to expand into that attracts companies that are both well-versed and inexperienced in senior housing.
But to Burke, who has spent years in the past building a senior living platform, it’s a market that is “harder than it looks.” Among the model’s biggest challenges occurs in lease-up, where sales cycles are longer than in traditional senior living.
“It’s purely a choice-based move, which only makes that sale that much harder and longer,” Burke said.
Because rates are lower and more attainable in active adult — especially for the middle-market — operators must also be careful not to add too many overhead costs. That is easier to do in active adult than in other product types, like full-service independent living; but it is something operators must take into account all the same.
Another challenge and long-term concern in active adult communities is that residents will enjoy the community, services and price point so much they might choose to age in place longer than they otherwise would, leading to the phenomenon sometimes known as “age creep.”
However, Burke also believes that hiring an experienced active adult operator like Greystar will preclude that outcome.
“The manager … needs to be clear with the resident and their family when they come in that no [traditional senior living] services are provided,” Burke said. “If the management team can do that, then I think that they will avoid having the average age creep up.”
Another challenge to growth in the active adult sector is the fact that interest rates rose recently despite two domestic bank collapses and international financial turmoil. The health of regional banks, which are a common source of debt for new active adult projects, is “very important right now,” Burke said.
“I think capitalizing new deals, especially for folks that aren’t well capitalized themselves with strong balance sheets and ample liquidity is going to be a real challenge,” Burke said. “And I fully expect new starts to continue to decline for ‘23 and likely into ‘24.”
But the flip side to those challenges is that the playing field is widening for companies that can afford to grow amid higher barriers to entry.
“The order of the day for us is to create flexible agreements … but we do feel as though we are a group that, between us and our capital partners, will be able to capitalize deals,” Burke said. “If we can do that, and others have more additional challenges, that will leave us in a good spot.”
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