Seniors investment potential wide open

Despite some hiccups in the assisted-living sector, the long-term investment and development potential of seniors housing is far from spasmodic, with a huge demographic bulge moving smoothly and steadily into the hands of a healthy industry.

Current trends show an eager, active adult market with increased activity in Alzheimer's care. A study conducted by the National Investment Center for the Seniors Housing and Care Industries (NIC) of Annapolis, Md., shows nearly 46% of lenders interviewed are more likely to finance assisted-living projects that incorporate an Alzheimer's wing.

Absorption in the assisted-living sector is slower than anticipated, but the forecast is good, with fill-up expected over time. Increased competition is producing diversification, with affordability among the differentiating features of the properties. Interest is expanding in the independent arena - which has been relatively "ignored" over the past 10 years - further weighing the continuum on its front end.

What looks like overbuilding is actually supply waiting for demand to catch up. The demographics speak for themselves, with an elder population that won't peak for two more decades. Although the statistics will not save every investor in this industry, the future market for development appears to be wide open, and will look even more appetizing as consumers begin to digest the various product offerings and start swallowing up supply.

A WAVE OF ACTIVE ADULTS There's a huge age wave rolling in, and at its crest are the country's oldest baby boomers: They are not the frail elderly, but energetic adults in their mid-50s that only the American Association of Retired Persons (AARP) considers "senior."

"There's no question that the active-adult sector is beginning to impact the industry in terms of sheer numbers," asserts Bob Kramer, executive director of the NIC. "This segment doesn't require healthcare or personal care - simply a change in lifestyle. Where assisted living is need driven, usually with an adult child making the decision, the active-adult market is lifestyle driven, with the seniors making the decisions.

"They're deciding on age-restricted houses, townhomes and patio homes built around golf clubs with resort-like amenities and clubhouses," he continues. "They want design features that provide more than just an upgraded empty nest, but a sense of community and of being able to age in place, confident that their next move has been postponed."

The trend in active-adult living is supported by two major facts, notes Kramer. First, the National Association of Home Builders (NAHB) in Washington, D.C., forecasts tremendous growth in new housing projects and renovations for this segment. Second, this November, the NAHB will launch the "Senior Housing Show," which will focus exclusively on the active-adult, independent-living sector of the seniors housing market.

Asserts Leslie Marks, executive director of the NAHB's National Council on Seniors Housing, adults as young as 55 years, "represent the industry's greatest growth sector and will be the force behind the next building boom."

Chicago-based Senior Lifestyle Corporation (SLC), with 70 seniors communities of 10,000 units in 17 states, is one of the firms focusing on the younger senior market (for a full profile on SLC, please turn to page 6 of this Continuum Supplement). Bill Kaplan, SLC's chairman and CEO, says the company is pursuing development of separate cottages and villas on its independent housing properties to "attract younger seniors, typically couples, allowing the continuum to begin at a more active level, rather than at a need-driven stage."

ALZHEIMER'S CARE BLIPS THE RADAR Alzheimer's/dementia care is a second wave of development opportunity forming a blip on the radar screen. The segment is forming a much-needed niche, similar to the advent of assisted living many years back. As assisted living grew from independent living, Alzheimer's care is emerging from assisted living and is spinning off as companies spread their wings with a genesis of stand-alone Alzheimer's facilities.

Of these freestanding Alzheimer's projects, most will emerge in rural areas where the sprawling acreage they require is less expensive, says Dwayne Clark, president and CEO of Aegis Assisted Living of Redmond, Wash., one of the companies developing Alzheimer's care as a core of its business strategy.

"The challenge with stand-alone Alzheimer's care is that the people afflicted with the disease need to wander, which means the project needs to be on ground level, with an enormous amount of land required to make the building's numbers work," explains Clark. "You won't see many of these one-story buildings in urban locations; they'll penetrate the rural communities with populations of about 50,000, one hour from a metropolitan area."

Clark says the number of people with dementia in the United States is predicted to grow to an estimated 7 million within the next decade. The number of providers who understand how and where to build an Alzheimer's project, and how to manage and care for those residents, is limited.

Among the factors scaring people off is Alzheimer's patients' higher acuity level and the medical skill set required to address it, an atypical physical plant, and the increased regulatory environment. Supply is practically non-existent, but demand is growing, Clark says, while medication for the disease is just scratching the surface.

Alterra (formerly Alternative Living Services) already has several Alzheimer's-only facilities operating today and will actively pursue this segment into the next century, claims Bill Lasky, president and CEO of the Milwaukee-based company. With 370 senior-living facilities and 60 more under construction, Alterra adopted its new name to leverage a broader spectrum of services including Alzheimer's care.

Lasky points out that the industry's increased interest in the Alzheimer's segment is not being generated by greater returns on investment, but by supply and demand, with projects for the frail elderly being built more rapidly than freestanding facilities for Alzheimer's care. "Alzheimer's projects address a more needy, higher acuity resident, require a more intensive staffing pattern and tend to be a more expensive building type compared to assisted living, but its overall investment potential is no different," Lasky explains. "The two facility types target different customers, but on a pure investment assessment their underlying economics are the same, with a similar return on equity."

At Marriott Senior Living Services of Bethesda, Md., Mike Giacopelli, senior vice president of development, says the market potential for Alzheimer's care is in its infancy, and that the segment will go through an evolution before a refinement of its operating programs emerges, within about five years. "The industry is only in its first wave of Alzheimer's care; it's too soon to tell where this sector will go, particularly if the healthcare arena begins solving the problem medically, which would change how we serve that segment."

The NIC reports that investor interest in freestanding Alzheimer's facilities or dedicated wings in larger assisted-living residences is strong. Of 138 respondents to a recent NIC survey, 45.6% said adding a dedicated Alzheimer's wing to an assisted-living project would increase their interest; 9.6% said it would decrease their interest; and 44.9% said it would have no change.

ASSISTED LIVING CATCHES ITS BREATH In addition to the strong interest in Alzheimer's-related care facilities, the NIC continues to see a healthy growth rate in the construction of new assisted-living residences. "There is overbuilding, but not in the sense that the projects won't fill up over time," asserts Kramer. "The problem with an aggressive proforma is that when you don't have the cash reserves to fill the project over 18 months instead of a year, you're in trouble. This doesn't mean the market is saturated, but rather that fill-up is taking longer than it did for the first few players in the market. Those who exhibit a staying power, focus on programs that differentiate them or who seek new markets within this sector are likely to succeed."

Kramer notes the slowdown in new starts is due primarily to credit tightening and fears of overbuilding. He says also that most assisted-living companies have focused on suburban markets in the top-50 MSAs, and are not yet comfortable with taking the product to second- and third-tier markets.

Jeffrey Davis, chairman and president of Chicago-based Cambridge Realty Capital, confirms the "breath-catching mode" taking place in assisted living that has come as a result of poor performance by certain public companies, coupled with last fall's credit crisis. "People are taking a pregnant pause because the earnings of some public assisted-living companies weren't what they said they would be," he says. "Absorption is taking longer, and competition is greater than anticipated. In addition, residents are older than owners expected, bringing stronger state regulations than they envisioned.

"However, we don't see the performance issues being perceived today as being long-term indices," says Davis. "The future for assisted living is very positive." He adds that this segment is the perfect medium for growth with financiers, because it combines the multifaceted products of real estate, healthcare and aging in an attractive format that financiers can understand.

Lasky says one of the factors affecting performance is that in order to achieve the desired returns, some investors mistakenly select operators that are not experienced in service delivery. "Assisted living is not a real estate play, but a service industry play," asserts Lasky. "To approach financial success, an employee-intensive service structure is required to supply the care within the real estate. A successful assisted living venture may spend $0.40 of every dollar on staffing, which is unusual compared to other real estate investments. I would encourage anyone interested in achieving strong returns in this segment to utilize an established operator than can produce the service infrastructure it requires."

At the American Seniors Housing Association (ASHA) in Washington, D.C., executive director David Schless reports that increased competition has affected some slower than anticipated lease-ups in certain markets, but that the assisted-living product is still quite strong. "Assisted living will continue to grow but at a slower rate than the past three years when it represented 75% of the industry's new construction," he says. "As that segment grows, there continues to be good opportunities in seniors apartments and congregate living, and for certain developers to pursue the continuing care retirement communities.

"Over the next 30 to 40 years, as the population of those 65 years old and older more than doubles, there will continue to be good opportunities in assisted living and in the other segments," he adds.

TARGETING LOWER-INCOME RESIDENTS As the senior population continues to grow, so does the number of participants in the assisted-living arena. With this growth, those in the industry are finding that competition has increased not against other nursing homes, but against themselves. One of the ways they are distinguishing their products is by making them more affordable. This is creating a tremendous draw for assisted living and seniors housing overall, since those seniors with the lowest incomes have the greatest need for seniors housing, and the greatest propensity to move there, states Kramer. An upcoming NIC study shows that more people can afford assisted living than commonly thought.

"In more than 1,000 assisted-living residences, nearly two-thirds have annual incomes of less than $25,000 below the minimum cut-off designated by most market feasibility studies," says Kramer. "There's a terrific pent-up demand at the low- to middle-income level, particularly for age-restricted seniors housing providing personal care, as well as assisted living. The companies able to provide a quality product that can be afforded by the lower income segment will draw unbelievable demand."

Marriott's cottage-style Maple Ridge assisted living concept addresses this market with less costly, one-story wood construction and a location strategy targeting sites that are less expensive than normally selected for assisted living. "We see a stronger focus on segmenting the market in terms of moderate pricing," says Giacopelli. "The first wave of assisted-living development was premium-priced, but there is only a limited number in that category in terms of potential customers. It's a natural evolution to refine the product to make it affordable by more people. However, that product must be provided without compromising the quality of the services delivered. That's the challenge."

A HEALTHY INDEPENDENT MARKET In addition to affordable living, independent living though neglected in the past has also been in steady demand. In response to this, Giacopelli reveals that Marriott is also looking more heavily at the independent market. "We're finding that the supply of independent living has dropped off in terms of industry trends, while demand has continually increased," he says. "Supply has diminished because the product requires a much larger site, which is often hard to find, and because financing is more challenging to acquire. To make the projects economical, they require a greater number of units to offset the fixed costs associated with services."

Davis of Cambridge Realty Capital confirms that there has not been any major independent seniors housing development compared to that of the early- to mid-1980s in the nation's largest 50 MSAs, and predicts a wave of new independent/retirement projects over the next 36 months.

"The retirement sector suffered a major overbuilding and financial restructuring in the 1980s, due in part to poor research that caused problems such as off-target markets and overly ambitious absorption and rental rates," he says.

Davis believes today's independent segment's target markets are right and strong; anticipated absorption is more realistic; operators have matured; acquisitions have taken place; building, rather than acquisition, is now being seen by public and private firms as less expensive; and a severe lack of proposed development exists in the majority of major markets, with numerous opportunities for owners, developers and investors/lenders.

"Financiers like independent retirement communities because they are similar in nature to traditional commercial real estate investments," Davis states. "They don't have the significant barriers to entry as other projects in the seniors care arena, and municipalities are considerably more welcome to them."

THE CAMPUS STRATEGY With the growth of campus-like facilities comes the need for a more continuum of care. Giacopelli says Marriott also believes in this strategy, but that it requires the operator to be comfortable with providing more regulated services. "The more of a continuum you offer, the more healthcare you must provide, which is accompanied by increased state and federal regulations," he says. "Our research shows that customers prefer a full continuum of care. This can't be provided by just any real estate developer, but by one that is both service and healthcare oriented."

Both campus and freestanding housing is being delivered in many flavors and varieties, which is good for customers and for investors, says Lasky. "Clearly there is an opportunity, when specific sites allow it, to create a very large campus where several levels of care can be wrapped together within a continuum," he reports. "However, market and site availability for campus projects is limiting compared to the freestanding facilities. In addition, part of the attraction that adult children of seniors have particularly to freestanding assisted living projects is that these facilities are more intimate than massive continuum care campuses."

The appeal of facilities that offer multiple levels of care is partly because residents become potential consumers of each stage of care, says Kramer. "Lenders are looking more favorably on projects that combine two or more levels of care, because they serve a broader market and thus have longer staying power with residents, who become automatic customers for the next level.

"However, though there is an insurgence of attention being drawn to the continuum product, it is a mistake to view it as an interest at the expense of assisted living," he continues. "Providing a spectrum of care is just another way of differentiating a project."

PRODUCT DIVERSIFICATION Offering a variety of care levels can set one facility apart from the rest. However, a continuum ofservice, affordability and Alzheimer's care are also ways seniors housing professionals are distinguishing their products. Rather than provide a separate assisted-living program, some congregate care players are looking at home healthcare. "The concern some people have about this is that, historically, seniors who are independent don't like to be next door to those who need more intense, assisted-living services," notes Kramer.

He adds that more seniors housing firms are seeking to diversify with fewer companies pursuing just one model. "It's interesting to note that public companies like Care Matrix, American Retirement Corporation and Sunrise, which are no longer pursuing the same models they've always offered, are seeking to diversify in response to an increasingly competitive marketplace," says Kramer. "Everyone is focusing on the bells and whistles that make their mousetrap better than the one across the street. All this is healthy for the market. As products get more diversified, they tend also get better."

As products diversify, public ownership of seniors housing does not appear to be moving from one area to another, reports Lasky. He says Wall Street will continue to be attracted to assisted living because of the tremendous need for it and because revenue is predominately private-pay revenue.

Of the public healthcare REITs, Davis of Cambridge Realty reports that broad-based prosperity in this industry has evaporated. Low stock prices have made issuing new stock to fund acquisitions difficult for most REITs, with capital commitments nearly bone dry. However, many of the recent credit challenges will begin to dissipate during the second half of 1999, says Davis. The conduit markets will take a more definite form during this time, as will the banking system.

"Wall Street has learned more about seniors housing and healthcare. We believe in the future of the public senior housing/healthcare market," Davis asserts. "Those players that can adapt quickly will enjoy many opportunities, with capital and continued expansion available into the next century."

Clark of Aegis Assisted Living says the IPO market for assisted living might come back, but the excitement of taking a small company with no earnings public is gone. He says smaller, public assisted-living companies will be swallowed up over the next 24 months in a massive consolidation. Public companies will control only about 10% to 12% of the entire industry.

"This is and always will be a small regional, neighborhood business, where being a public company may not an asset but a burden," he says, adding that access to information can easily swing public opinion. "There's a whole new age of public information access that didn't exist 10 years ago."

OVERALL MARKET IS DEEP As the nation reinvents how seniors will live and receive healthcare, there is a need still unsatisfied. "As the industry shifts from an institutional to residential model, and as many of yesterday's institutional, long-term care facilities begin to outlive their economic usefulness, all the capital in the world wouldn't provide enough specialized real estate to catch up with the societal shift this nation is experiencing," Lasky says.

"There's been a lot of building over the last four years, but still it isn't enough," he continues. "Absorption in particular markets may take longer, but it's an extreme view that the nation is even close to being overbuilt.."

While the need to stay competitive within the assisted-living industry is certainly a key strategy, the seniors housing market must remember that variety is the spice of life. In this arena, where demand flourishes and building remains steady, consumer digestion of all the various product types, service offerings and specific options will mean the difference between who takes off and who stops to catch their breath.

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