Opportunity Knocks

AFTER THE WALL STREET-FUNDED overbuilding of assisted living facilities in the mid- and late-1990s, it may be tempting for commercial real estate investors to forget about seniors housing. That would be a mistake, according to Mel Gamzon, president of Ft. Lauderdale, Fla.-based Senior Housing Investment Advisors Inc., an advisory and real estate brokerage firm. Gamzon, who is an executive board member of the American Seniors Housing Association and a 20-year industry veteran, says now is the time for savvy investors to take a closer look at this industry, in large part because of a mushrooming seniors population. Gamzon recently shared his thoughts on the industry with NREI.

NREI: In terms of investment interest, seniors housing seems to have fallen off the radar screen in recent years. Why has this happened?

Gamzon: We certainly have had difficulties in the last few years, specifically with regard to the assisted living portion of our industry. Wall Street really led the charge in assisted living. It looked at demographics and considered financial projections, which essentially were overzealous. This was a pioneering phase of the assisted living business, where Wall Street should never have been in the first place. The publicly traded companies, except for a limited number of survivors today, really fell by the wayside.

NREI: When do you foresee renewed investor interest?

Gamzon: We are seeing new investor interest in the congregate and continuing care sectors and to a much more limited degree in the assisted living segment. This is certainly an opportunistic time for forward-thinking investors to acquire some of the early-stage assisted living assets and companies. Smart investors are looking beyond the missteps of the early stages of assisted living and realizing this is a sector with sound operating statistics.

There is just no getting around it: The demographics are absolutely compelling. In 2000, there were approximately 35 million seniors, age 65 and older. By the year 2020, this figure is forecast to increase to about 54 million.

We are seeing an increasing amount of investment in this industry, albeit at a bit slower pace than we saw during the early stages of assisted living. But we are seeing investments from pension funds and their advisors and institutional advisors. Private equity also is making substantial investments in the business.

We foresee a growing amount of interest on the part of not just institutional investors, but private equity placement investors and international money, which is beginning to move back into the business.

NREI: In what kind of shape are the supply and demand fundamentals of the various seniors housing property types?

Gamzon: As I just indicated, demand in the form of demographics is extremely compelling. In terms of supply, today there are more than 46,000 seniors housing facilities throughout the United States, which house more than 3.2 million residents. That's just in the congregate, assisted living and continuing care facilities. Supply is very much tied into the cost and availability of capital, which has been significantly diminished over the last couple of years, once again, predominantly because of the mistakes that were made in the assisted living sector.

In terms of assisted living facilities, supply and demand are coming closer into balance in most markets. They're not totally into balance, but with the limited amount of new construction in assisted living throughout the United States and the increasing demand for this housing and service type for seniors, we foresee a time very soon, within the next 12 to 18 months, when we will be at that point of equilibrium.

Whereas the nationwide occupancy rate of the assisted living sector is in the mid-80% range, the occupancy rate for the overall seniors housing industry is approximately 95%, according to statistics from the American Seniors Housing Association (ASHA). So, there has been a lot of smoke created around assisted living that has hidden the reality that this industry is solid as a rock and moving forward.

NREI: The construction of new seniors housing properties has slowed considerably in recent years. When do you predict that there will be a significant increase and what property types will be the biggest components of the increase?

Gamzon: If we take a look at the construction statistics over the past five years, the peak year for new construction in the industry was 1999. In that year, there were approximately 66,000 seniors housing units constructed, according to ASHA. The vast majority of those units were in the upstart assisted living sector. The statistics for 2001 show that approximately 29,000 units were built. So, you're looking at less than half of the construction that we saw in 1999.

It's my feeling that we will, and have begun to see, a slow increase in new construction. When we will actually see a significant increase is very difficult to predict.

My best guess is that we will experience what I would define as “measured growth” — meaning a total of about 30,000 to 40,000 units per year — over the next two to four years. Considering the size of the seniors population, this is not an extraordinary amount. Once again, I would simply say that this is a positive sign. We are not going to see rampant new development.

So, what types of new products will be out there and will become increasingly important in the future? Senior apartments, for one. These are age-restricted apartments with the most minimal of services that are geared to a maturing population and not necessarily for those folks who are in their late 70s and early 80s.

In addition, we are going to be seeing an increasing amount of what I will call blended congregate and assisted living communities, where the housing and service options are effectively combined, so we will see fewer pure stand-alone assisted living in the future.

Also, we're going to be seeing a very strong for-sale housing market throughout the United States, meaning an increased focus on senior ownership models in the forms of condominiums and cooperatives. This is a product type on which I am extremely bullish.

Another area of new construction activity will be in the form of mixed-use development. We're finding that senior consumers do not want to be isolated socially, but very much want to be part of vibrant, mixed-use environments where there are employment opportunities, and cultural and other activities.

NREI: How difficult is it for seniors housing players to obtain debt and equity?

Gamzon: First of all, equity has been out there. It hasn't been inexpensive to procure, but it has been out there for the owner/operators who have very sophisticated management teams in place.

In terms of debt, that is where we are really having difficulty. Freddie Mac, Fannie Mae, HUD, private enterprises such as GE Capital, GMAC and a handful of others are providing capital to the business. And predominantly, they are providing capital for the acquisition and/or refinancing of stabilized assets, for very opportunistic acquisitions where value can be created with new management teams in place. Where we are having difficulties, and will continue to have difficulties, is in new construction.


Senior apartments: Apartments designed for residents age 55 and older. These properties may offer meal service and usually feature a limited amount of supportive care services.

Congregate seniors housing communities (also known as independent living communities): Properties that feature a more extensive array of service than senior apartments. Services vary, but often include building security, activities, meals, and on-call nurse or physician. Units usually are rented but may include condominiums or cooperatives.

Assisted living residences: These facilities feature 24-hour protective oversight and assistance with daily activities such as walking, dressing and bathing.

Continuing care retirement communities (CCRCs): These facilities offer a variety of living arrangements and services to accommodate residents of all levels of physical ability and health. In general, CCRCs make independent living, assisted living and skilled nursing available on one campus.

Source: American Seniors Housing Association

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