Can a big promotional push in seniors housing keep occupancy rates from falling further?
Slipping occupancies at seniors housing developments across the country have forced owners and operators to ramp up sales programs and boost advertising budgets in order to retain and attract residents, even if the added expenses cut into the bottom line. Until the residential housing market recovers and sales activity normalizes, experts say these aggressive measures to court seniors will continue because entrance fees and rents come largely from the sale of their homes.
Eighty-five-year-old Dorothy Fisher probably wouldn't have moved to a continuing care community if she hadn't received help from the developer. Fisher wanted to move to Fox Run, a project developed by Erickson Retirement Communities in Novi, Mich. But first Fisher had to sell her two-bedroom condominium.
Erickson assigned a move-in coordinator to help Fisher. The coordinator helped stage the home for sale and found Fisher a real estate agent who recommended lowering the condo's price by $5,000. “I wouldn't have come down in price without that encouragement,” says Fisher. The unit sold in two weeks. Erickson also gave Fisher time to pay the entrance fee (fees start at $117,000) that came from the sale proceeds of her condo. “It turned out great,” says Fisher.
Seniors housing owners and operators are providing new residents with all kinds of help. They're waiving move-in fees and reducing rents. The big entrance fees at continuing care communities are being discounted and new types of contracts are being offered to widen the pool of buyers.
Bridge loans are available to seniors to pay the rent until their homes sell. And in some distressed areas building owners even purchase homes outright to make a move possible.
“More money is being earmarked for marketing than I can ever remember,” says Michael Berne, managing director of the seniors housing group at real estate services provider Jones Lang LaSalle. Marketing budgets at buildings are up by 5% to 10% this year, says New York-based Berne, though some budgets have increased by as much as 15%. “Over the next year, I suspect that number will creep up even more.”
Marketing costs for a 300-unit continuing care project are now $10 million or more for a typical five-year program that includes sales staff salaries, office rents, promotional materials, advertising and special events. Marketing an apartment building through lease-up costs at least $2 million, say industry experts.
Longer lease-up times coupled with ballooning marketing budgets could reduce profits substantially, says Berne. Expected returns on seniors housing properties have been averaging 10% to 14%. Berne projects returns of about 7% in the next 12 months. The bottom line could take a further hit because of the rising cost of fuel and food.
Housing prices plunge
The incentives are in response to a slumping single-family home market where prices have fallen 18% to 20% in the last 24 months, according to the S&P/Case-Shiller Index. Deals also have slowed to a trickle. Until the end of last year, the seniors housing industry had been on a tear. Occupancies were rising, demand was strong, and properties were selling at premium prices. Building owners could count on annual rent increases of 7%.
Many seniors have been reluctant to sell their homes in the wake of a housing slump and credit crunch tied to the subprime mortgage crisis. Instead, they're waiting for prices to rise.
The average occupancy rate at independent living buildings nationally is 91.4%, down 240 basis points from the peak of 93.8% achieved in the first quarter of 2007 in the top 31 markets tracked by the National Investment Center for the Seniors Housing & Care Industry (NIC). Rents have held steady, though operating expenses have risen. And except for a few markets, new supply has been constrained and will remain so because of the financing crisis.
Independent living facilities have taken the biggest hit because residents usually move by choice. Assisted living and skilled nursing buildings haven't been affected as much because residents who enter those facilities typically are in need of assistance.
In the second quarter, the occupancy rate in independent living was at its lowest level since the third quarter of 2005 when it hit 90.5%. No comparable data from the 2001 recession is available.
“Independent living units are proving to be challenging to lease,” says Ron Aylor, senior vice president of sales at Brookdale Senior Living, a publicly traded seniors housing company in Nashville.
Weapons in their arsenal
To keep buildings full, owners rely on the standard marketing tools — advertising, special events and public relations campaigns. But owners tend to shy away from TV advertising, which is expensive and doesn't produce immediate results. Direct mail targeted at specific groups seems to work better so operators are sending out more direct mail pieces.
“This is the time to invest in advertising, not run away from it,” says Mike Serio, senior account director of the advertising group at Erickson Retirement Communities based in Catonsville, Md. Erickson operates 23 continuing care communities in 13 states.
Erickson increased its advertising budget this year, though Serio declines to provide actual numbers. And the company might increase its ad budget again for 2009, he says.
At Greystone Communities, marketing costs average about $40,000 per unit, or about $8 million for a typical size project. Greystone is a developer currently marketing 40 continuing care properties for its partners.
“We have had to readjust our numbers,” says John Spooner, executive vice president at Greystone, based in Irving, Texas. With sales in tough markets down 15%, it takes longer to fill a new project, about 36 months now compared with 24 months previously.
Merrill Gardens, which is a building owner and operator based in Seattle with a portfolio of 53 buildings, extended the lease-up period from 18 to 24 months at its project in Santa Maria, Calif., because of a weak local housing market.
The building has a new 103-unit addition, composed mostly of independent living rental apartments. “It does impact the bottom line,” says Steve Delmore, executive vice president at Merrill Gardens.
Developers to the rescue
Many marketing efforts focus on specific programs to help seniors sell their homes so they can move to a new building. Three years ago, Erickson beefed up the marketing program at its Fox Run property in Novi, Mich., when the local housing market tailed off due to a sharp downturn in the auto industry.
Fox Run houses about 800 residents; Erickson will open a seventh building on the property this year. Entry fees average about $250,000, and monthly fees are approximately $1,600.
To boost sales, Erickson created the “Moving Home” program. It provides referrals to real estate agents, and also offers the assistance of a moving consultant free of charge. Last year, the program helped sell 150 homes. The average time it takes for a home in the program to sell is 90 days. That compares with 111 days for houses in the top 25 metro markets, according to Altos Research.
The Erickson program has been so successful that it was recently rolled out nationwide as Erickson Realty & Moving Services. “Seniors know they'll get help,” says Sharon Baksa, who heads up the effort. The program led to an increase in the marketing budget, says Erickson's account director Serio, though he won't say by how much.
Moving Station offers similar services. The Chicago relocation company works with 75 seniors-only communities. In addition to providing moving services, the company launched a home sale program last year. It provides the senior with a real estate counselor who finds and manages a local agent, and then handles all aspects of the home sale process.
The counselor also offers advice on pricing, says Pati Saulig, vice president at Moving Station. “If [seniors] put their houses on the market at a high price, they'll blow it.” Homes in the program average about 42 days on the market.
Saulig says business is brisk. In the last four months, Moving Station has signed 17 new seniors housing clients for the home sale program. Communities pay a one-time setup fee of $5,000 and $350 per unit enrolled. If moving coordination is included, communities pay a one-time $10,000 setup fee and $500 per unit. Moving Station earns a performance incentive if the building leases up faster than projected. The company also launched a home purchase program.
Bevy of incentives
Building owners are rolling out the perks to move units faster. About 70% of the units owned and managed by Merrill Gardens are independent living apartments. In some cases, Merrill drops the move-in fee, also known as a community fee, that averages $2,500.
“It's one less financial barrier to overcome,” says Delmore, the executive with Merrill Gardens. On selected units, monthly rents are reduced to $2,300 from $2,800. “It's a loss leader to create more activity in the building,” he notes.
Merrill Gardens has boosted sales commissions, too. Leasing agents now earn $300 per unit leased, instead of $200. They also receive a 10% to 15% bonus on top of their total commission.
In June, Merrill enlisted Elderlife Financial Services to provide bridge loans for seniors to pay the rent until their homes sell. In the first month, three residents used the program to move in. Another four contracts are in the works.
Fresh ideas are surfacing. Brookdale introduced a loyalty program. The community fee is waived if a resident transfers from one Brookdale building to another. Aylor says it has boosted occupancies at Brookdale's assisted living properties. Most of the transfers are residents in need of additional care. “It's one way to leverage our product offering,” he says.
Continuing care communities pose a particular challenge because of their high entry fees. Some building managers waive the monthly fee for six months — generally considered sufficient time to sell a house. The incentive at some properties totals as much as $30,000.
In May, Erickson rolled out a national flex payment program after a successful test in Boston and Chicago. A resident can move to the campus after putting down 10% of the entrance fee. Until the house sells, seniors pay $50 monthly for every $10,000 owed. The payments are applied to the entrance fee.
Operators tweak offerings in other ways, too. Greystone recently retooled the marketing plan for a new continuing care project in Geneva, Ill. The project was renamed and a new life-care contract with health benefits was added. Entry fees on some units were lowered.
No free rent
Building operators are increasingly using special events to attract residents. Financial seminars, workshops on how to get organized in advance of a move, and an afternoon of entertainment and food are some of the popular programs.
Another approach is to offer superior service. Senior Resource Group is a privately held developer and operator of 15 buildings in the western United States. The San Diego-based company is also developing a 25-acre, 410-unit campus in Scottsdale, Ariz., and another is slated to break ground soon in Los Angeles.
Average rents are $4,500 a month. Leasing agents have a toolbox of incentives to be used as necessary, such as a $1,500 moving credit. “We don't believe in free rent,” says Michael Grust, president and CEO at Senior Resource.
Instead, Grust introduced a “Genuine Hospitality” program last year. Targeted at employees, the campaign emphasizes quality service. The staff receives rewards for excellent customer service.
An advertising campaign was built around the “Genuine Hospitality” theme. Print advertisements carried the motto. Press releases about the program were distributed to the media. Direct mail pieces were sent to prospective residents.
The program received an industry award for excellence last June. “I'd rather spend on wonderful service than give away free rent,” says Grust. He notes that the company manages two buildings in Florida for another owner and free rents are being used there to fill apartments.
Grust says that seniors housing units take longer to rent than they did a few years ago, but quality service generates referrals from current residents and their relatives. In a slow housing market where seniors have lots of reasons not to move, Grust says, “A good pedigree helps people make that decision.”
Jane Adler is a Chicago-based writer.