Labor and land costs are the primary drivers of a 6.4 percent increase in senior housing development costs for 2019 and a new CBRE report expects those costs to rise this year as well.
The research from CBRE Valuation & Advisory Services found the total cost for a senior housing development last year was an average $317 per square foot.
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The average cost per revenue unit was essentially flat and the average number of total revenue units per property dropped from 106 to 128. Hard costs (labor, sitework, foundation, building shell construction, roofing, interior finishes, landscaping, signage) were 66.8 percent of the total development cost. Soft costs (inspection fees, construction loan-related costs, architectural/design costs, project management) represented 19.5 percent of the total costs followed by site acquisition costs at 10.1 percent.
An uptick in perceived risk due to lower national occupancy rates is given as a reason for average returns (stabilized net operating income as a percentage of overall development costs) rising 9.5 percent in 2019, or approximately 60 basis points.
James Graber, managing director, Valuation & Advisory Services, CBRE, said in a prepared statement that developers are using a more rigorous selection process for projects in a ‘flight to quality’ that is resulting in lower construction starts projected for this year. The report notes returns on cost ranged from about 8 percent to 10.3 percent in 2019, compared to the 2018 range of 7.7 percent to 9.9 percent. There was no identifiable pattern based on CBRE’s review so the data is more deal specific based on supply and demand factors in the primary market area of each development.
While the development activity is expected to remain strong in 2020 and returns on cost expectations have increased, there is still an elevated perceived risk. Although still at high levels, development activity did slow in 2019. Citing NIC statistics, the CBRE report said there was a total of 60,883 units in 543 senior housing developments—excluding majority nursing care projects—under construction in primary and secondary markets in the fourth quarter of 2019.
The construction pipeline total was down 10.2 percent from the previous year. The cycle peak occurred in the third quarter of 2018, when 68,702 units were under construction. The report states continued moderation in development activity is healthy for the market because demand has not kept up with new supply, leading to a dip in occupancy levels and year-over-year rent growth.
Site acquisition costs—while just 10.1 percent of the total development costs last year, it is still a significant component. While the range depends on the market and location within a market, the average site costs, based on total revenue units, averaged between $12,200 and $31,200 per unit, or an average of $35.75 per square foot.
Hard costs—they generally fell within a statistical range of $166.25 to $245.50 per square foot of gross building area and 62.6 percent to 71.5 percent of total development cost. The primary variation is due to the building quality and materials of a project. Labor was a factor, both in availability and whether it was unionized. Average hard costs per square foot of gross building area rose 4.8 percent last year to $206.50 per square foot.
Soft costs—averaged $63.50 per square foot last year, up 7.6 percent from 2018.
FF&E costs—furniture, fixtures and equipment are not always included in development costs, but can represent a considerable portion of the costs, according to CBRE. Last year, CBRE estimates FF&E costs were about $8,800 per revenue unit, down 2.2 percent.
CBRE Valuation & Advisory Services, which completed valuations of more than 2,000 senior housing properties across the U.S. last year, used data from the valuations of 317 developments scheduled for delivery for this report.