The Affordable Senior Housing Challenge

Developers and service providers are grappling with the affordable senior housing dilemma.
Pearlon Oyster Bay

By 2029, 54 percent of the nation’s 14.4 million middle-income seniors won’t be able to afford private-pay seniors housing options for long before they exhaust their resources and become eligible for Medicaid. Out-of-pocket costs for assisted living will be $60,000 by then. Those telling—and sobering—statistics are key findings of a study released this past spring by the University of Chicago’s National Opinion Research Center and sponsored by the National Investment Center for Seniors Housing & Care, a Washington, D.C.-based research organization. The key takeaway? There is a huge need for affordable senior housing and care for middle-income seniors.

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Beth Burnham Mace, NIC
Beth Burnham Mace, Chief Economist and Director of Outreach, NIC  Photo courtesy of NIC

“If you think of this as multifamily housing in the workforce world, this is workforce housing, but for seniors,” said Beth Burnham Mace, NIC chief economist and director of outreach.

The study sent a shot over the bow of the senior housing industry, which has to date been most prolific at providing seniors housing solutions in the form of continuing care retirement communities for the top 20 percent of the market and the government-subsidized bottom 20 percent. 


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Providing this much-needed housing and related services has become the talk of seniors housing conferences, policy and finance summits. “Everybody is paying attention to this market. But nobody has quite figured out how to get their arms around this market, what it’s going to look like,” said John Cochrane, CEO of Pleasanton, Calif.-based HumanGood, which owns and operates 21 continuing care communities serving primarily the upper income demographic as well as 96 affordable senior housing communities.

The idea that the middle market is a monolithic, one-size-fits-all market is too simplistic. Rather, the cohort varies widely in its expectations, ability to pay and geographic location.

Most operators, Cochrane notes, are thinking in terms of a top-down strategy, what he calls a “CCRC-minus approach,” referring to the common shorthand for continuing care retirement community. That approach consists of slimming down existing models by finding savings in features which are characteristic of the upper middle market, like certain construction finishes.

In contrast, HumanGood is coming at the problem from the other end of the market, which he describes as “affordable housing-plus.” One approach already in use is cutting back on direct services and using resources available in the local as a way to make middle-market communities both affordable and experientially rich. 

Still, HumanGood is wrestling with a good deal, including the implications for site selection and building type. Cochrane believes that the solution will likely be something like intergenerational, mixed-use housing in transit-oriented markets, though what the individual pieces will look like is unclear.

How Do You Finance Affordable Senior Housing? 

John Cochrane, Pleasanton

Making the numbers add up, of course, is the linchpin. The challenge: How to structure a capital package that attracts the partners needed to develop the product to scale, operate it efficiently, and provide appropriate risk-adjusted returns without the products tipping over into a higher-income demographic.

This year, the oldest Baby Boomer turned 73. “But that’s just the tip of the iceberg,” Mace said. The economist, who comes from a private equity background, reported that there’s a lot of discussion about public-private partnerships and whether the industry needs a tax credit for affordable senior housing similar to some of the low-income tax credits.

Another type of public-private partnership might work at the local level; for instance, a municipality could lower the FAR requirement so that developers can build higher on a site. What Mace characterizes as a national crisis can’t be ignored, she maintains, because if no solutions can be found, seniors will spend down their assets to be eligible for Medicaid, which has insufficient resources to handle the demand. 

“I think there might be some opportunity for large institutional investment funds … to invest in seniors housing,” said Mace. Pension funds, in particular, could fit the bill, given the social responsibility aspect of the investment, though they might have to accept lower returns. Another hypothetical, she says, might be offering a retail investment opportunity for smaller investors.  

The more closely a senior housing community resembles a core risk, the better its chances for financing, Mace contends. More affordable senior housing should drive occupancy rates, which could, in turn, support a steadier investment return. 

On the debt side, Fannie Mae and Freddie Mac have both stated that affordable seniors housing fits in with their mission to provide more affordable housing. Both are heavily invested in senior housing and the default rates are close to zero, Mace observed. In addition, the big banks are interested, with some financing off their balance sheets and others working with the GSEs. 

On the equity side, Mace ticked off a wide range of investors that would make good partners if they choose to move into the affordable arena: REITS, high net-worth individuals, and private equity groups like AEW, PGIM, Harrison Street and Heitman, which have strong 10-year to 20-year track records of senior housing investment.

NAREIT senior economist Calvin Schnure agrees that REITs are well-positioned to find solutions to the affordability puzzle because the model is designed to manage large portfolios efficiently. Because REITs often specialize in areas like seniors housing or medical office, they can be more efficient and reduce costs, he added. Access to capital in the stock and bond markets lowers borrowing costs. “The REITs are thinking about how they can best provide that product, but it is going to be a challenge,” he said

REITs are still focused on high-end units; however, Schnure notes that Welltower Inc. stated this summer that it’s exploring more affordable senior housing products. That was followed the Toledo, Ohio-based REIT’s announcement in September of a collaboration with CareMore Health aiming to improve the quality of care, produce better outcomes and cut costs for residents of select Welltower communities.”

Can Technology Help Make Senior Housing Affordable?

Dale Watchowski, American House Senior Living Communities
Dale Watchowski, American House Senior Living Communities

And then there’s the ever-evolving technology piece of the puzzle. As Mace points out, there are now whole organizations devoted to developing technology specifically for senior housing, including the MIT Aging Lab and another group called Aging 2.0. 

Telehealth, for example, entails smart rooms where sensors monitor activity and raise an alarm when no activity is detected after a designated period. Smart carpets help seniors pick up their gates. The ability to synthesize data across properties on a mobile device across properties, staff and residents can reduce staffing. In the future, the use of robotics and AI will undoubtedly reduce the need for humans while still providing services such as medication reminders, social activities and mobility assistance. 

American House Senior Living Communities CEO Dale Watchowski says that technology has helped his company serve the affordable senior housing middle market, which has been the Southfield, Mich.-based company’s specialty for more than 40 years. “What we’ve discovered is the clinical component of our business is challenging and it has enabled us to better manage our costs,” he said. “And we’re on Yardi, which I think the industry has adopted for the most part. We are sourcing residents through technology to a much greater degree.”

The firm has shifted to a digital marketing platform. “That’s where we’re finding—contrary to what people might say—the senior population is the fastest-growing users of technology, whether it be social media or just using the computer,” said Jacqueline Trost, the firm’s vice president of marketing. That has resulted in dramatic cost savings resulting from the shift from print and broadcast outlets to social media. Trost calls it “a much more targeted way of advertising, as well.” 

What Are the Returns on Affordable Senior Housing?

With its portfolio of 70 primarily affordable properties, American House boasts an occupancy rate of nearly 90 percent. Lower construction and development costs, says Watchowski, give his company an advantage over its competitors. “We’re targeting returns based on our ability to offer rates that come in at the middle market level, so that’s the market that we’re trying to build to,” he says. “We will generally accept a lower return than others for the sake of pricing at the middle-market level.”

The senior housing owner and operator can borrow at a better rate because it chips in 35 percent to 40 percent equity on projects, as opposed to 20 percent to 25 percent equity in the traditional market, along with mezzanine debt. In Michigan, state affordable housing tax credits have made those developments truly affordable, Watchowski said. They also have waiting lists.

Community common areas are incorporated to reduce costs, and rents are bundled to include meals and entertainment. On-site home health-care providers, which include nursing, are not charged to residents unless their services are used. American House also provides transportation so residents don’t have to own cars, though many do.

Labor is sourced from colleges and universities, several of which are receive research grants from the American House Foundation, which raises funds for non-resident seniors for technology or other items they can’t afford.

American House has been slowly working through the issues that make senior housing structurally unaffordable for the middle-income cohort, its track record is a testament to industry ingenuity. 

And while the industry will likely have to sprint toward affordability to avert a crisis, the good news is the wheels of innovation have begun to turn in earnest.

Read the December 2019 issue of MHN.