This is the dawning of the Age of Operations

SAN FRANCISCO - A different sort of era in seniors housing has begun, one in which companies are concentrating more on operations than on new development opportunities. That is the conclusion of a new report published by the San Francisco office of Palo Alto, Calif.-based Marcus & Millichap. The company notes that the seniors housing environment is far from ideal. The industry is dealing with overbuilding concerns, complex payment laws stemming from the 1997 Balanced Budget Act, an increasing number of lawsuits and a decreased supply of capital, the report notes. Amid all of these factors, the number of new seniors housing units completed in 2000 will decrease compared with 1999, from 65,879 to 52,474.

"Over the course of the last several years, many of the major seniors housing chains have pressed forward with a 'build it and they will come' attitude," says the report. "However, as fill-up times have begun to lengthen, and as the competition in primary markets has heightened, companies have been forced to reevaluate their business strategy. Add to the mix reduced capital availability, poor stock values and several bankruptcies, and many chains have been forced to scrap development plans and focus on operations."

However, the decline in production "bodes well for the industry as many markets have already begun to feel the competitive pinch of overdevelopment," adds the report.

As evidence of the change in emphasis to managing operations, the report cites statistics showing that production plans for 672 seniors housing properties were either deferred or abandoned in 1999, up from 456 in 1998. Approximately 200 seniors housing facilities were deferred or abandoned in first-quarter 2000, meaning "it is likely that developers will continue to reign in their projects over the coming year," says the report.

The report also examines the seniors housing industry on a regional basis and shows that development is continuing at a brisk pace in some areas. The population of the Western United States age 75 years or older is projected to increase 16.4% - or by 900,000 people - by 2004. However, "despite the ripe opportunity promised by the surging seniors population, many of the developers and operators have been substantially impacted by Wall Street and will focus more heavily on operations rather than growth," says the report. Marcus & Millichap estimates that 193 new seniors housing properties will be completed in this region in 2000. Many of those facilities will be in secondary markets and rural areas, as years of development have crowded the urban areas.

In the South Atlantic region, Florida is leading the industry in a couple of ways. First of all, 70 facilities in the state halted production in 1999 - the highest total in the nation. But the state is also projected to lead the United States in new development in 2000, with 72 new properties to be completed. Marcus & Millichap attributes the production stops at least in part to the state's "litigious environment and the virtually unlimited damages available against seniors facilities."

While other regions may be feeling the effects of recent overbuilding, the North Central region - which includes Ohio, Illinois and Michigan - is making up for years of relatively small-scale seniors housing production, says Marcus & Millichap.

In the South Central market - which includes Texas, Kansas, Oklahoma and Tennessee - Texas is in danger of becoming overbuilt, warns Marcus & Millichap. The study predicts that 46 facilities will be completed in the state this year, roughly the same total as in 1999. Also, Kentucky and Oklahoma will each add more properties this year than in the three preceding years combined, the study adds.

Meanwhile, the Northeast market, including New York, New Jersey and Pennsylvania, will add 176 new seniors housing properties this year, says the report. Combine that with a projected 1.5% growth in the area's seniors population, and Marcus & Millichap notes that "the potential for overdevelopment remains an issue."

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