Niche Markets: Golden Age?

It’s supply vs. demand in the senior housing ring.
There’s a waiting list for Livingston School Apartments, which reimagined a Depression-era vocational school in Albany, N.Y., as 103 units of mixed-income apartments. Images by Christian Skully

There’s a waiting list for Livingston School Apartments, which reimagined a Depression-era vocational school in Albany, N.Y., as 103 units of mixed-income apartments.
Images by Christian Skully

Senior housing is drawing the interest of a lot of developers these days, and for good reason. The aging population is creating plenty of demand, occupancies are steady, asking rents are rising and returns are healthy.

“Demand for senior housing units is far outpacing the supply of available units,” said Matthew Whitlock, vice chairman of the National Senior Housing Group at CBRE. “And there is an ability to develop new senior housing units based on the availability of low-cost capital in the marketplace.”

But despite the demand, concerns are rising about overbuilding in some markets that could cause a slowdown in absorption, leading to lower occupancy rates. That’s causing some lenders to take a more critical view of proposed projects, developers and facility operators.

As in years past, much of that overdevelopment is occurring in the assisted living segment. Total senior housing units in the 31 largest metropolitan areas has grown by 7.6 percent over the past three years, according to Beth Burnham Mace, chief economist for the National Investment Center for Seniors Housing & Care. Assisted living dominated that growth, increasing by 12.7 percent, while the number of independent living units increased by 4 percent.

“After the recession, a lot of activity came back to the market, and it was viewed that assisted living, because it’s more need-based, was a little more recession resilient,” said Mace. “So that’s where a lot of the development dollars went.”

Indeed, in January, Newport Beach, Calif.-based REIT research provider Green Street Advisors reported that assisted living units are being constructed at twice the rate of independent living. And the impact of that new construction is starting to affect assisted living occupancy rates.

According to the NIC, the occupancy rate for assisted living in the 31 largest U.S. metropolitan areas was 87.6 percent in the fourth quarter of 2016, down from 89 percent in the fourth quarter of 2013—and at a six-year low. Yet the average asking rent in those markets was $4,643, up from $4,258 in the fourth quarter of 2013.

The occupancy rate for independent living in the same markets was 91.1 percent in the fourth quarter, up from 89.9 percent three years earlier and at a seven-year high; average asking rents were $3,119, up from $2,863 in the fourth quarter of 2013.

“Demand has been fairly high for assisted living, but new supply has come on, and we haven’t quite been able to absorb some of it,” said Allen McMurtry, an executive director at Cushman & Wakefield in Tampa.

According to Mace, in the fourth quarter of 2016, the net absorption for assisted living units was the highest it’s ever been—4,700 units in the 31 largest metros—yet occupancy fell because with 5,900 new units coming online in the same quarter, the demand simply wasn’t strong enough to satisfy the supply.

Independent living supply and demand is much more balanced. In the fourth quarter of 2016, inventory grew by 1,842 units but net absorption was 1,846.

Oversupply concerns

Due to all the construction activity, some assisted living markets are getting stressed, with slowdowns in occupancy rates and rents. Austin, Denver, New Orleans and Jacksonville, for example, will have a lot of inventory to absorb and may face an oversupply of assisted living, Mace said. Other markets—such as San Jose, Memphis and Toledo—have very few projects under construction.

Independent living is another story. Of the 99 markets the NIC tracks, new construction constitutes less than 1 percent of inventory in 37. In particular, there are relatively few independent living units under construction in Albany, N.Y.; New Haven, Conn.; Pittsburgh; Riverside, Calif.; and San Diego.

On a national basis, senior housing construction starts as a whole are beginning to slow down, Mace said. And since banks are becoming more cautious, a natural slowdown may soon offset any oversupply.

Opportunity knocks

Concerns about oversupply of assisted living may be short-lived, however. Demand for senior housing remains strong, and many active development markets are seeing population growth. “Atlanta has experienced tremendous new development, as have Dallas and Denver,” Whitlock observed. “I do not mean to suggest that these housing units won’t ultimately be absorbed—there is demand for the product—but there might be a slowdown in absorption.”

And niche opportunities abound for well-capitalized developers.

 Adaptive reuse. Transforming an existing structure into senior housing offers advantages to developers. “You can’t get much greener than reusing an existing building,” said Scott Maenpaa, a project architect with The Architectural Team in Chelsea, Mass. “As long as the structure is sound, there should be cost savings.”

Maenpaa has worked on a number of innovative senior projects, including adaptive reuse. One recent effort created Livingston School Apartments out of a Depression-era vocational school in Albany, N.Y. The 230,000-square-foot building was converted into a 103-unit, mixed-income senior community. The $20.7 million project is fully leased, at rents ranging from $625 for a studio to $1,200 for a two-bedroom unit—and there’s a waiting list of more than 100. The developer financed the project through a variety of private and public funding sources, including tax credits and subsidies from the federal, state and city governments.

Affordable housing. There’s a huge need for affordable housing across all sectors of the market, and senior housing is no exception. But making the numbers work on an affordable project can be challenging.

Big Rock Partners is developing Windsor at Celebration, a 239-unit, Gensler-designed senior living facility in Walt Disney Co.’s Celebration community in Orlando. Image by Shimahara Illustration

Big Rock Partners is developing Windsor at Celebration, a 239-unit, Gensler-designed senior living facility in Walt Disney Co.’s Celebration community in Orlando.
Image by Shimahara Illustration

“Everyone is trying to find the secret for providing an appropriate level of quality care, albeit at an affordable price,” said Russell Dey, a vice president at Bethesda-based commercial real estate lender Walker & Dunlop. “Your average retiring American is typically not in a position to pay $5,000 a month for assisted living.”

Luxury facilities. Baby Boomers are the wealthiest generation in U.S. history, and many are retiring with sufficient wealth to support a luxury lifestyle. Developers in affluent markets, like South Florida, are responding. Walker & Dunlop recently closed a $41 million construction loan for Windsor at Celebration, a senior living rental community in Orlando by Big Rock Partners. Scheduled to open in 2018, the luxury facility will include 239 independent living, assisted living and memory-care units. The property will be the only senior housing project in the area, and the developer believes demand is strong.

High barriers to entry. Experts note that there are opportunities in cities with high barriers to entry—such as Boston, San Francisco, Los Angeles and Seattle—where land is expensive and the entitlement process is long and challenging. There’s been little senior development in these cities, yet demand is strong from those seeking an urban lifestyle. Well-capitalized developers with the ability to acquire the land—and the patience to wait out the entitlement process—could do very well in these areas.

LGBT communities. A small but growing segment of the senior housing sector is LGBT housing. One new project, the Los Angeles LGBT Center’s new Anita May Rosenstein Campus in Hollywood, Calif., was approved in November. Slated to open in 2019, the campus, designed by Santa Monica-based KFA Architects, will include as many as 100 units of affordable housing for seniors. Additional projects are in the pipeline around the nation.

Originally appearing in the March 2017 issue of MHN.