Global Real Estate Monitor
A Monthly Newsletter Exclusively for Commercial Real Estate Executives
September 2008 VOL. 2
Sponsored by GE Real Estate - Produced by National Real Estate Investor Magazine

Seniors Housing Roundtable
Experts weigh in on industry trends

This month, the Global Real Estate Monitor conducted a roundtable with several industry experts to discuss the most pressing issues facing the seniors housing sector. The experts include:

  • Granger Cobb, president of Emeritus Corp., a Seattle-based firm that operates 288 seniors housing communities in 36 states

  • Michael Berne, managing director of Jones Lang LaSalle's seniors housing group in New York City

  • Len Fishman, president & CEO of Hebrew SeniorLife, a Boston non-profit that will operate more than 1,400 units of senior housing by 2009, serving more than 5,000 seniors

  • Julie Harding, chief operating officer of Atria Senior Living Group, a Louisville, Ky.-based company that owns or operates more than 130 seniors housing communities in 27 states

  • Robert G. Kramer, president of the National Investment Center for the Seniors Housing & Care Industry

  • Curt Schaller, senior managing director for GE Healthcare Financial Services’ real estate investment team

  • Michael C. Wachs, president & COO of AMC Delancey Group Inc., a Philadelphia-based company that develops and owns office, retail, residential and seniors housing properties  

GREM: What type of seniors housing will receive the most demand over the next 10 years? And where do you expect to see the largest demand?

COBB: In terms of increased demand by product type, we expect to see the greatest increase in memory care for Alzheimer's and dementia residents since the prevalence of dementia and Alzheimer's disease is expected to double in the next 10 years. Also, there are fewer options for those residents because it's much more difficult to care for those seniors at home or with home healthcare; our penetration is much higher in that market.

In terms of location, demand will be spread equally between suburban and urban locations. I believe that people like to be close to their families, so seniors housing becomes less of a destination than a convenience.

FISHMAN: Historically, suburban locations have been more popular. Recently, there has been more interest in urban areas. The Boomer generation, especially, will want to stay involved and in the thick of the action and that means more downtown housing for seniors. Cities like Boston, which are safe and have great public transportation, restaurants and cultural venues, will be attractive.

HARDING: All types of senior housing, including active adult communities, independent and retirement living communities, assisted living communities and continuing care retirement communities (CCRCs), will continue to receive increased demand in the coming decade.

KRAMER: The greatest demand exists and will continue to exist within the independent living (IL) sector. Levels of desirability for IL among senior households exceed current inventory in virtually every market. Many IL markets boast 95 percent (or better) median occupancy despite aging properties. For example, according to NIC MAP (www.nicmap.org), Los Angeles County has a median IL occupancy rate of 96.1 percent despite the median age of an IL property being 30 years old. New properties that are being developed tend to fill very quickly without much adverse effect on existing competition. 

Progressive developers tend to target suburban infill locations that have high barriers to entry.  There has been a movement recently toward very high end projects. Developers also tend to target areas that have attractive demographic growth rates, such as Atlanta, Dallas, Houston, Denver and Phoenix. These markets and a few others will continue to see activity. This does not mean, however, that other markets are unattractive. For instance, Boston has negative demographic growth (projected at -0.4 percent for the next five years), yet has one of the country’s highest occupancy rates (97 percent) and very strong revenue per unit at over $2,800 per month.

WACHS: We believe Independent Living will be the biggest growth area because today’s seniors are remaining healthy and active well into what would have been considered the sunset years for the previous generation. Today’s 80-somethings have the health and vitality of their parents at 60 or 70. And we expect that healthy lifestyle trend to grow even stronger when the Baby Boomer generation shortly begins turning 70. 

Both urban and suburban models will continue to have their place. Most of our development efforts are currently focused on our suburban model for seniors who seek a communal lifestyle, but don’t desire to move far from home. We're also looking at longer term urban strategies, which are consistent with people moving back into our cities for all that they have to offer. We think the urban strategy especially holds opportunities for people seeking a community with a specific lifestyle focus such as religious, ethnic, gay/lesbian, spa or arts-influenced.

GREM: There have been stories recently about seniors housing communities that have been built on or near college campuses. Does this herald a new way of thinking about aging? 

BERNE: There are a number of university and college settings for seniors housing, but this trend will greatly accelerate in the years ahead. In fact, JLL has formed a specific team within the Seniors Housing Group to focus on this type of development.

FISHMAN: Yes. One of the main differences between seniors of the past and today is the higher level of educational attainment. Today’s elders are more likely to be college grads who take for granted that they will keep learning throughout their lives. Colleges are centers of culture (even in small to medium size towns) and may appeal to alums. Whether you’re near a campus or not, senior housing communities need to provide sophisticated and varied life-long learning opportunities for their members.

KRAMER: Many universities are considering or have considered continuing care retirement communities (CCRC). They primarily view it as a way to provide retirement living to alumni near or even on the campus of the university.  There are a number of such communities and recently they tend to be high profile.  Projects such as Classic Residence by Hyatt in Palo Alto, Calif. and The Clare at Water Tower in Chicago are both high-profile, luxury, university affiliated CCRCs. Both communities are in high demand and are collecting entrance fees from residents and prospective residents that are among the highest in the country. Kendal Communities also manages a number of university-based CCRCs.

WACHS: It’s a great example of the specific lifestyle focus I mentioned earlier. Universities and the communities that surround them offer arts, culture, stability and the vitality of youth. That is a very appealing mix for many seniors. Some university communities are somewhat close-minded when it comes to allowing growth and development – they are fearful of compromising the pleasant lifestyle with an influx of new residents – but I think that will change over time as municipalities begin to recognize the value of a mature, vital population that does not stress the transportation or educational infrastructure.

GREM: Beyond the Baby Boomers aging, what other demographic trends will have the biggest impact on the seniors housing industry?

BERNE: Aside from the Boomers, the present 65+ age group will live longer, healthier and wealthier than we had previously anticipated (due to medical advances and lifestyle changes). Additionally, we are beginning to see developers and operators recognizing the opportunities within ethnic and alternative lifestyle groups.

COBB: One of the bigger shifts that is going to occur is that seniors will become more concerned about amenities and less concerned about cost as long as they think they're getting value. Technology will be a huge shift that seniors housing owners and operators are going to have to deal with. Our residents by and large are not terribly tech literate, but Baby Boomers are, both in terms of computer savvy and Internet savvy, and assisted living will have respond to that and cater to it.

HARDING: The biggest demographic driver of senior housing is not currently the Baby Boomer generation, at least not directly. In the short term, the senior housing industry can and should benefit by increasing its penetration level among seniors. By penetration, I am speaking of the share of seniors that use senior housing services compared to the number of seniors in a given market. I’ve seen statistics that show that in many markets, senior housing serves less than 5 percent of the senior population in that particular market.

KRAMER: There are some retirement communities being developed with an eye on specific ethnic groups, religious preferences or other characteristics (university affiliation, for example).  I would not characterize this as having a big impact on the seniors housing industry. There is such a tremendous amount of opportunity for well planned (developed, priced, marketed and operated) product in this sector that virtually every niche is open. The biggest impact the industry will see is in changing the perceptions of seniors housing by the elderly. Many elderly think of seniors housing as an old-style institutional nursing home, of which they have an extremely negative perception. The real product is far from that and one of the most common sayings amongst the elderly after they move into seniors housing is “Why didn’t I do this earlier?”.  If the industry can change this perception, it will see unprecedented growth.

WACHS: The fact that people are remaining healthier and more independent late in life is the most important driver. Along with this comes a greater sense of empowerment than previous generations of seniors and a strong desire to actively participate in their environment rather than simply be catered to. As an example, in AMC Delancey communities, we look for opportunities to engage our residents in daily activities such as teaching art and dance classes. It’s not just about bingo anymore! 

GREM: A number of recent reports have indicated that senior citizens in the U.S. have lost a lot of wealth because of the housing slump. How do you feel the current housing slowdown is impacting the seniors housing industry?

BERNE: The current housing situation is impacting the seniors housing industry in that some development has been put on hold, some facilities are taking longer to reach stabilization and some age restricted communities are not selling well. I expect that this will continue until there is an upturn and/or folks begin to understand that the prices of 2006 may take much longer to return.

COBB: The overall housing market decline has had a minimal impact on assisted living because a move into assisted living is event-driven – something has happened to prompt that move. Our typical seniors have no debt on their property, and while they may have lost some paper wealth with the housing downturn, it's probably not enough to prevent them from a move if they need it.

FISHMAN: The downturn is affecting seniors housing pretty much like the other sectors of the housing community. When seniors can’t sell their homes, or sell them for a price they’re willing to accept, they postpone making a move. This is especially true for those seniors for whom a move is most discretionary – that is, they’re well and independent and can afford to wait. However, older, frailer seniors who are most in need of supportive housing may choose to move despite getting less for their home (and a drop in their portfolios). In general, those who might, in another economic climate, have chosen to move to senior housing may well decide to sit tight and wait for their home values to go up again.

KRAMER: The private pay side of the business has seen some impact most likely due the housing slump. According to NIC MAP, occupancy for IL is down approximately 170 basis points year over year, from 93.8 percent in the first quarter 2007 to 92.1 percent in the first quarter 2008. It is important to note that while occupancy is down, it is down from all time highs in the sector. For instance, occupancy was 220 basis points lower (89.9 percent) in first quarter 2005. Occupancy is lower in most markets but revenue growth continues to be at or above inflation. 

There are many investors who believe the housing downturn will have a greater impact on the industry than it has. While home values are a large part of affordability for independent living, many seniors own their own home free and clear. From a spring 2008 ASHA (American Seniors Housing Association) Special Issue Brief, a Statistical Survey of Senior Homeowners, 74 percent of respondents reported that the owned their home with no mortgage, and on average, they have been in their homes for 24 years. So seniors are dealing with houses that have fallen in value but, in large part, still have tremendous amounts of untapped equity.

WACHS: That is definitely having an impact right now, especially in the suburban model, but we don’t feel it is a permanent resetting of industry fundamentals. New communities that are still ramping up could feel the pinch as prospective residents wait to sell their homes. 

GREM: How is the current credit crunch impacting the seniors housing industry?

COBB: For established operators with a track record and a decent balance sheet, credit is still available. You have to put up a larger equity component and the underwriting and appraisal has become a little more conservative. Banks are being a little more careful in terms of the loans. It's slowed down the growth in the industry, particularly when it comes to new development. Projects that could be put on hold have been put on hold. It also impacts the smaller operators that might not be as well capitalized and could put some pressure on third-tier operators that have debt coming due, which they need to refinance. The current environment will lead to more consolidation as we head into next year, and I think it will happen at second and third-tier operator levels because they are the ones that will be feeling pressure.

FISHMAN: Significantly. Hebrew SeniorLife closed on a $457 million tax-exempt financing in December 2007. It would have been much harder if we had done this even a month later. At the very least, the terms would have been different and less favorable. The crunch is visible locally, as organizations in the Boston area are scaling back or delaying plans to build additional senior housing.

SCHALLER: The buzz in early 2007 was that construction would boom in 2008; those predictions have not materialized. New development plans have either been postponed or canceled. Similar to the commercial real estate sector where transaction volume has dropped 80 percent from the market peak, senior housing M&A activity has dropped to a six-year low.

From a capital markets perspective, seniors housing operators have fewer options as many financial services providers have exited the market. Additionally, spreads have increased significantly, underwriting is more conservative and holds sizes have gotten smaller.

GREM: What advice do you have for seniors housing operators looking for financing in the current environment?

COBB: It really does come down to a proven track record because lenders want to make sure that they're dealing with operators that have demonstrated success.

FISHMAN: Have a great deal…or wait.

SCHALLER: Given the current environment, financial services companies prefer deals with seniors housing operators that have strong fundamentals – someone who knows the business and has a successful track record. Those that do not have strong fundamentals are going to have a tough time finding financing.

Financial industry standards are tighter and spreads are as high as they have been in the last five years. Permanent debt is still relatively cheap considering treasury rates, but floating rate debt terms are not going to coax people out of loans they signed in the last couple of years.

For those that have no choice, important factors to consider when choosing a finance company include certainty of execution and long-term commitment to the seniors housing market. Seek reassurance that a finance company can do what they say they are going to do in today's tough environment and get a written loan contract.

GREM: What lasting impact will the credit crunch have on the financing landscape for seniors housing?

COBB: I think that a year ago, investors seemed to be very concerned that there might be another rash of overbuilding because demographic demand was outpacing new supply by a large margin. But, the credit crunch has taken care of that, and in some respects, it's slowed down new supply for the next five years and anything that wasn't an absolute slam dunk hasn't been financed. It ensures that demand will continue to outpace supply for the next several years.

FISHMAN: If we’ve already seen the worst, then it will have little impact. If we haven’t, then it will impact the senior housing market for some time to come.

SCHALLER: Long term demographics for our industry remain strong. We are just seeing a typical cycle play out. Marginal operators could be culled out, providing stronger players with opportunistic growth plays. The best run operators will be able to weather the storm and may end up acquiring many of the remaining players.