When one thinks of “active adult” or 55+ communities, the first thing that comes to mind for many of us is Del Webb’s “Sun City” brand. These are huge planned developments with upwards of 10,000 individual living units, ranging from single family homes to duplexes to apartments, with a large variety of sizes. They are usually in warmer climates and are often centered around golf and other outdoor sports and games. And, they involve the purchase of the units, not renting. Another brand is The Villages in Florida.
These types of communities are not bought and sold, since the residents own their homes, but there have always been the smaller 55+ communities that are more like traditional apartment buildings, without the services that are included in the traditional full-service retirement community, that is now known as “independent living.” That is becoming a bit of a misnomer with so many assisted living and memory units now added to IL developments or conversions.
Historically, we did not track these 55+ buildings when they have sold because we never considered them to be seniors housing. They were just age restricted with limited or no services. In addition, these were often what some have called “low-brow,” and many were old and not in very good physical condition. Perhaps “low-brow” is what is needed today, and for many years to come, as the percentage of retirees without pensions increases, and as baby boomers with limited financial resources start downsizing and looking for alternatives. But instead of low-brow, think moderate income, at least more moderate than what has been targeted these past several years in seniors housing.
So, what is this new interest in the 55+ properties that are rentals and not equity purchases? And what impact will this have on traditional seniors housing, if any, down the road? First of all, like most everything else, they do come in different sizes, shapes and price points. There are, however, a few key differences from traditional seniors housing. The entry age is much lower (for now), the rental rates are lower, and there are fewer (if any) services, but any services you want are paid a la carte. In other words, you aren’t charged for services you don’t want or don’t need. Apparently, this is a big deal for the customer.
…what impact will this have on traditional seniors housing, if any, down the road?
There are differences of opinion regarding the targeted move-in age for active-adult apartment buildings. Some say 68 to 72, others say mid-70’s. Regardless, they are all younger than the current average age for traditional, full-service independent living, as well as for CCRCs. This can be considered the gap period, from traditional retirement at 65 to maybe 80 and above when you want services and are thinking about your healthcare needs. And perhaps one of the reasons for the renewed interest is that the leading edge of the baby boomers is currently 72 years old, so the numbers of people in that entry, or gap, age will be quite voluminous for the next 20 years. Sorry, traditional seniors housing is still going to have to wait another 10 years for the explosive, baby-boomer-driven growth. Unless, of course, they are proactive in dealing with this gap period.
In addition to the looming demand, another reason why developers and some seniors housing investors are eyeing this market is because it bypasses some of the problems afflicting the more mainstream seniors housing markets, especially assisted living. The occupancy problems that have threatened the financial stability of several companies and communities make it less desirable to develop these mainstream properties today, even though such development continues to proceed with abandon in some markets. But from what we hear, there is no occupancy problem in active adult communities, even those that may be showing their age.
…..traditional seniors housing is still going to have to wait another 10 years for the explosive, baby-boomer-driven growth.
The second reason why there is new development interest is that it is just easier to build than traditional seniors housing. The zoning is easier, there is much less common space, and the amenities, at least for the more moderately priced communities, are not as expensive. So, the coming in price-point and investment is lower. In addition, in some of these developments, space is set aside to add a commercial kitchen and dining area should the need arise, but not spending on it today.
The third reason is that from an operating perspective, the operations are actually minimal. The builder or manager does not have to worry about the labor issues impacting seniors housing today, and perhaps for years to come. We have heard of lenders passing on new seniors housing developments because of concerns about labor, not just cost, and whether there will be any available employees in a given market. You can’t really open your doors if you are not fully staffed, unless you want your license pulled. This is not an issue with active adult communities. There are no nurses, aides, food preparers or servers. As one investor told us, the most important employee is the activities director, because these 70-year-old’s want things to do, and it’s not bingo.
Besides the age, what does the demographic look like? These are people who have been in their homes for the past 30 to 40 years who are tired of home maintenance, want to downsize, probably want to monetize their equity (maybe before the next housing downturn), but really don’t want to commit to “retirement living” as it is currently portrayed in traditional seniors housing. They don’t need or want the services, but don’t want to have to worry about chores. They have income between $35,000 and $75,000, but spend a much smaller percentage of that income on housing, unlike for assisted living and full-service independent living.
Basically, it is the current target market for traditional seniors housing, but 10 years younger and not as wealthy. They want nice apartments, but are not as concerned about marble or granite countertops. Most important of all, they are healthy and active, and want to remain that way for as long as possible. Traditional seniors housing would love to capture this demographic (at least the wealthier ones), because that would extend their lengths of stay quite significantly. But the model would have to change, and the current model is definitely trending toward higher acuity, older age and a mix of care levels. Active adult living seems to be the antithesis, at least for now.
Basically, it is the current target market for traditional seniors housing, but 10 years younger and not as wealthy.
But what happens when these active adult residents age, you might ask? For now, that may be the subject of some discussion. Some people think that for these residents, 55+ apartment buildings are sort of a temporary stop before full retirement living. But if I am happy in my new two-bedroom apartment and have made some new friends along the way, why would I move? Our guess is that you probably wouldn’t, unless there were personal reasons, such as moving to be closer to your children and grandchildren.
The more obvious answer is that they will stay as they age, and will then need services to deal with increasing frailties. The whole push nationally has been for home- and community-based supports and services, and 55+ apartment buildings seem like a natural extension for that. Not everyone wants that to occur, however, and these buildings could have happen to them what has happened to full service independent living communities that have added assisted living and memory units: the increase in walkers and wheel chairs, which end up being a turn off for prospective independent living residents. Holiday Retirement Corporation lived through this several years ago, as the line of walkers outside the dining rooms became a problem. It is the “I am not that old” phenomenon, and often results in the prospect moving on or waiting yet another few years to move into seniors housing. It certainly has to be a contributing factor to some of today’s census problems.
We are not sure how much today’s developers of 55+ communities have thought about this. The assumption for some of them is that their residents will move on as they age. But if they don’t, and they bring in assisted living services through home healthcare agencies, then these active adult communities may start to look like something else as they mature. Some may end up looking like unlicensed assisted living communities, and since these are the residents’ homes, there are few restrictions on what services they can bring in. We will get to the ramifications of this later on. Lenders seem to be eager to provide funding for the new 55+ developments, as they appear to be less risky in today’s market and fill a current unmet need at a reasonable price point. We have heard that lenders such as M&T Bank, Wells Fargo and United Bank have either funded these or are taking a serious look. Even though the fashionable thing post-recession was to lend to and invest in “need-driven” properties, where demand could be more readily determined, the risk profile of these 55+ communities appears to be lower, both from a cost to build perspective and an operating perspective.
…these active adult communities may start to look like…unlicensed assisted living communities.
Loan to value for new construction is about 60%, and 65% to 70% for permanent financing. From what we hear, cap rates on stabilized buildings are close to multifamily cap rates. If these are successful, one could argue that the cap rates should be even lower from a risk perspective. They have the advantage of being low risk from an operational perspective (no labor and regulatory risk), but also have the advantage of longer lengths of stay if residents bring in services. In other words, they may have the advantage of being need-driven longer term (assisted living) without the operational risk of assisted living (multifamily). A logical conclusion could be that, with the best of both worlds, the cap rate could be lower than for multifamily. Ponder that one for a few minutes.
Now, herein lies a potential problem for traditional seniors housing, and all the statistics that investors, developers and lenders rely on. In the eventuality that some of these 55+ communities ultimately become unlicensed assisted living communities, how do you factor that in when looking at supply and demand? And, if they truly begin to resemble assisted living when they mature, will they be taking a part of the expected boom in assisted living demand that so many developers and investors are counting on? Just when the boomers start to hit 80, these active adult communities will be maturing and could start to syphon off some of the expected increase in demand. Whether their lower rents plus the cost of added health services will keep their total price below full-service assisted and independent living is not known, but it is likely and something to be watched. We are not trying to scare anyone, but those who believe that seniors housing, or skilled nursing for that matter, are going to remain as they have been, five, 10 and 20 years from now, had better think again. Just like how CCRCs are beginning to drop skilled nursing from the menu of care options, and just like independent living has added assisted living and memory care, we should not be so arrogant as to assume that the status quo will remain so, despite the looming baby boomer demand. It is that looming demand that will be so disruptive in ways that we can’t yet predict, let alone understand. Ten years ago, would you have thought there would be a tequila-themed Margaritaville? We didn’t, and that is the point.
…we should not be so arrogant as to assume that the status quo will remain so, despite the looming baby boomer demand.
Right now, groups such as the joint venture between Greystar and The Carlyle Group (NYSE: CG), with 12 to 18 active adult communities either opened or under construction, and Capitol Seniors Housing (CSH), with one opened and three under development, may be leading the way in growth of this market. But more will be coming, especially as that portion of the less wealthy baby boomers start to retire and seek something affordable, but “nice,” before they start to think about care. We see this more as the evolution of the seniors housing market, not something to be scared of, but to be embraced as yet another solution for the growing elderly population.
There have been some recent transactions in this market in addition to new developments. Capitol Seniors Housing has acquired Sienna, an upscale active living community in New Jersey. Located on 15 acres, Sienna currently has 85 residences, but CSH is about to build out the campus by adding seven additional buildings with 119 units for lease, plus a state-of-the-art clubhouse. These new units will all be two-bedrooms ranging in size from 1,115 square feet to 1,873 square feet. Construction is expected to be completed by next summer.
Holliday Fenoglio Fowler (HFF) has been active in the space as well. It is currently selling a 90-unit community in Colorado as well as a 140-unit community in Oklahoma City that they are actually touting as a possible conversion to full-service independent living. In addition, HFF has completed the capital raise for a to-be-built 55+ townhome community with 146 units in Center Moriches, New York with a total project cost of $58 million. Obviously, this is at a higher price point than what we have been discussing. But that is the point. These 55+ communities can be at various price points, can appeal to tequila-drinking party lovers or other themes, and can be small or large, depending on demand. In other words, something for everyone, and the “everyone” will be growing.
