Having successfully developed an assisted living community for Medicaid beneficiaries in the Washington, D.C. market, Northbridge is now underway on a similar project, with Amazon (NYSE: AMZ) among the backers.
Amazon’s involvement will “give us a little more flexibility” in the new community compared to the first, Northbridge Communities President Wendy Nowokunski said at the recent Senior Housing News BUILD event in Orlando. Amazon invested equity into the project as part of the company’s $2 billion commitment to preserve and create affordable housing in three markets: Arlington, Virginia; Nashville; and the Puget Sound area of Washington State.
Northbridge and partners also are eyeing three more development sites in the Washington, D.C. area, Nowokunski said.
Operators nationwide have taken steps in recent years to address senior living’s affordability, and industry groups have published recent insights on the demographic of older adults known as the “Forgotten Middle.” But at what pace that development is happening in the middle market appears sluggish at best given the myriad macroeconomic challenges.
A handful of middle market operators are making inroads to bring scale into the middle market, and Northbridge’s leaders are optimistic about the ability to serve this demographic. The company is looking to harness lessons learned in its more affordable, Medicaid-focused buildings as well as its portfolio of approximately 20 market-rate senior living communities across the Northeast.
“We’re trying to find those efficiencies as best as possible,” Northbridge CEO Jim Coughlin said at BUILD. “With the escalation in construction costs, it makes it more challenging to pull buildings out of the ground …There’s creativity, and where the market provides opportunities is where we’ll be looking for.”
Affordable assisted living development ‘requires an army’
Getting projects to pencil out can be a tough proposition given the development challenges seen this year, and affordable senior housing always is especially complex.
“Development from a conventional perspective requires a village,” Northbridge President Wendy Nowokunski said. “Affordable housing development requires an army and it really did take an army to get this project off the ground.”
The project in question is The Residences at Kenilworth Park, the assisted living community that recently opened in the Washington, D.C. area. The “army” involved included HallBridge Partners – the venture that Northbridge formed with HallKeen Assisted Living – as well as Gragg Cardona Partners and the D.C. Housing Finance Agency (DCHFA). The project was funded by $58 million in bonds and $20 million in 4% LIHTCs (low-income housing tax credits) from DCHFA, as previously reported by SHN.
What made the project’s build-up so unique was the current challenging development cycle, Coughlin said, with the project being part of the revitalization of a blighted neighborhood in Washington.
The project was pioneering in the sense that it was part of revitalizing an area that “had been left to be lost,” Coughlin said.
“It created momentum and a catalyst to where there’s now another 150 units being redeveloped, getting rid of 1950s vintage housing and creating more safe housing,” Coughlin said. “It’s really moving the entire neighborhood in a positive direction.”
The greatest challenge, Coughlin said, has been the qualification process for potential residents and finding proper documentation needed for older adults, some of whom were “left by their adult children” in the care of nursing homes for decades.
With a reimbursement rate of $218 per day, the Northbridge leaders said the operational model is spread across the 150 units to function properly.
“The beautiful part of that is we’re getting a good rate and we’re able to provide the same level of service [as in a typical AL community],” Nowokunski said.
‘Lessons learned’ and the future of middle market
While Coughlin and Nowokunski take pride in the fact that the D.C. community in many ways is indistinguishable from a market-rate building, there are differences; notably, the average age of residents in the community is 71, a stark contrast from a typical community’s average age 80 or higher.
“These are lessons learned that have people who don’t have the privilege of having good health care,” Nowokunski said. “…From a development perspective and operations perspective, we are looking at that for the next projects that we do.”
That means considering new design elements to accommodate higher-acuity residents within future middle market projects, Nowokunski added, referencing that a third of the Kenilworth Park residents are blind or deaf.
Another lesson learned centered on furnishing the units, a step that Northbridge did not take for Kenilworth Park but would address in future builds, Coughlin said. Northbridge invested heavily in large-scale windows to bring natural light into the community. The property also has a fixed solar array to cut down on traditional utility costs.
“Combining spaces and creating airiness was very important and investing in systems that are very efficient,” Nowokunski said.
Coughlin emphasized that these decisions were “not just part of an ESG agenda.”
“It’s really how we nibble away at the expense side of the equation to have long-term success,” he said.
The D.C. community has also been able to attract and retain high-quality staff, Coughlin said, adding that the addition of workers motivated by social mission has been a “game-changer.”
The next development will be built on Benning Road. Without the low-income tax credit requirement, that will help expedite the move in the process of future residents.
“That is going vertical right now,” Coughlin said. “I think it’ll allow more flexibility on eligibility for people as well, so we are really looking forward to that.”
In the future, the company is considering distressed asset acquisition and adaptive reuse of existing communities. But with the macroeconomic challenges at present, expect new projects to not start in the next 12 to 24 months, Nowokunski forecasted.
The difficult development climate adds further challenges to the prospect of serving not just the Medicaid market but the middle market, which Northbridge’s leaders are interested in being able to reach at a larger scale.
“There’s this giant middle market that is underserved, and how do we get to that is the key,” Nowokunski said. “Can we do it today or tomorrow or in the next 24 months? I don’t think so, but I think we will be able to in the future.”
Coughlin noted that there has been progress on creative financing and development techniques such as panelization to help uplift middle-market products, with the biggest challenge being labor costs that account for 65% of a community’s bottom line.
“How and what unique models can be brought to that equation to mitigate the expense side of operating and actually delivering a margin into a middle market product?” Coughlin asked. “…That’s what is going to attract institutional capital to support a more middle-market product, is if you can show a clear path to margin that’s defensible.”
The potential for acquisitions in the next 12 to 24 months is going to be a “big opportunity,” Nowokunski said. To make middle-market operations work, that could include changes to the operational model that might consider universal workers, increased in-building robotics. That’s all aimed at reducing costs.
And already, Northbridge has played at least around the edges of the middle market. The company managed to raise more than $300 million and acquire 11 buildings during the Covid-19 pandemic, and some of those properties were serving “the higher-end of the middle market,” Nowokunski said.
Creating an operational model that supports a sustainable margin at a middle-market rental rate “can be done,” if a community is acquired at the right basis, she said.
Both she and Coughlin are hopeful about the sector’s prospects for creating a scalable middle-market model in the next five years.
“I think there’s a huge opportunity, from learning from each other, being open, and there’s so much creativity and expertise, and a willingness to share,” Coughlin said. “So, I’m very optimistic that things will move in the right direction.”