Even prior to the pandemic, finding senior housing on a fixed income had always been a challenge. Due to supply issues, wait times for designated affordable units can span several years, and apartments in private, traditional senior communities often come with a hefty price tag, placing them out of reach for most.
A number of organizations, both for- and not-for-profit, are now targeting senior housing’s long-underserved middle market. Demand is strong and likely to rise as a result of COVID-19. The pandemic is weighing on the overall senior housing development pipeline while operating costs of traditional properties remains high, even as occupancy slips.
“We’re really talking about the 80 percent of the (senior) population … We’ve got the people who either don’t want or can’t afford a traditional life plan community, and the people who do not and will never qualify for a subsidy. How do we meet their needs?” John Cochrane, CEO of HumanGood, posed this question on the third day of the National Investment Center for Seniors Housing & Care (NIC) fall conference.
Bill Pettit, president & COO of R.D. Merrill Co., and Jim Lydiard, staff vice president of CareMore Health, joined Cochrane to discuss ways to effectively service this population segment. Torey Riso moderated the panel.
Given the middle market’s diversity, it’s no surprise that the range of solutions is equally varied. Some operators, Cochrane mentioned, are targeting the upper middle market by adapting traditional life plan communities to a more cost-conscious model. While this is a good strategy, he argued, it will still leave a large cohort out: the lower middle market. “Can we take our expertise at low income development and property management and use that as a launchpad to get into (this market)?”
HumanGood examined one of its mixed-income, mixed-use projects to find a potential answer: the 112-unit Plaza Roberto Maestas, opened in Seattle’s Beacon Hill neighborhood in 2016. Cochrane noted the development “is meant to be a porous community, and … that provides a different residential experience, but also makes it much more economically viable.”
Breaking with tradition
Building off his experience with Merrill Gardens, Pettit offered a different perspective. Initially, he had acquired older, less costly inventory to target middle-market seniors, but there was a catch: “Frankly, it was our operating expenses that were increasingly driving cost and what we had to charge in the way of rent,” he said.
In the end, Pettit realized that the company needed to shift its focus away from a full-service model of senior housing. “We could take (the traditional approach) and deconstruct it to look for the major components of value that we delivered to seniors and think of them in a different way.”
Cochrane likened some traditional senior housing operations models to “the cable bundle that nobody wants anymore. (It) offers 500 channels, but … they’re only willing to pay for 16.” He expanded on the idea of unbundling as a way of identifying how an operator could focus on its best practices while collaborating and partnering with other groups to meet resident needs.
Streamlining with partnerships
CareMore Health’s Lydiard said that senior communities which utilize partners to bring additional health care services into senior housing properties can lead to significant operational savings, particularly in terms of personnel expense reduction.
Pettit said that, in full-service operating models, personnel costs can add up to more than half of a community’s total operating budget. Lydiard noted that CareMore’s model can offer an alternative. “In several of our markets, we’ve got enough membership, enough density in some communities we support, not only do we have a nurse practitioner on-site … but we actually even have medical assistants, community health workers or pharmacists embedded in some of these communities.”
Economies of scale do play a critical role in ensuring partners can make their activities pencil, however. “I can’t do much with one or two residents on a campus; I really can’t,” Lydiard commented. “But I can do a heck of a lot with 50.”
The scale-up of solutions could be well underway, however. Cochrane and Pettit noted that middle-market senior housing communities currently make up roughly 50 percent of their respective portfolios, and both have plans to expand further in coming years. And partnering could really make the difference: “Through partnering on the care side and … custom solutions on the dietary side,” said Pettit, “we can operate these buildings at $1,000 to $2,000 less a month in rent from the seniors—arguably at a lower margin, but … we’re still delivering yields on costs, by our models, in the 8.5 to 9 percent unlevered basis today.”