Beaten but not broken

Long-term care developers are itching to build, imploring lenders to “show us the money”

Like a post-acute resident in a skilled nursing facility, the health of the U.S. economy can be summed up in a single word: fragile. The recovery is definitely underway, but it’s touch and go, according to the pundits and prognosticators who analyze every economic indicator, from gross domestic product and housing starts, to employment rates and foreclosure statistics.

To the 1,800-plus attendees at this past September’s National Investment Center for the Seniors Housing & Care Industry (NIC) conference in Chicago-the networking and deal-making event for long-term care owners, developers, brokers, and bankers-the slightest sign of economic recovery offered a beacon of light at the end of a long, dark tunnel. Developers and owners, in particular, have been hammered in recent years by declining occupancies, nonexistent credit, and relentlessly dismal news.

NIC President-and industry cheerleader-Bob Kramer sums up the mood among attendees as “cautiously optimistic,” despite having weathered “some of the worst economic conditions since the Great Depression.” But unless you’re a developer with a proven track record, a spotless credit history, and a healthy relationship with your banker, your chances of securing funding for that next CCRC or assisted living project are pretty slim, at least for the near term.

By the numbers

Construction activity in the senior housing sector has slowed to a crawl over the past year in the nation’s top 100 metro markets and is even slower when compared to two years ago, according to the Seniors Housing Construction Trends Report, which was often referenced during the NIC conference. Produced jointly by NIC and the American Seniors Housing Association (ASHA), the report provides an overview of current construction activity for seniors housing properties as of March 31, 2010.

Supply of Investment-Grade Seniors Housing and Care Properties in the U.S.

By Property and Unit Counts across Property Types, Campus Types, and Care Segments | Estimates as of 4Q09*

* Estimates are representative of properties with at least 25 units/beds that charge market rates for the housing and services offered.

** One nursing bed is equivalent to one unit.

Source: National projections based on NIC MAP Data & Analysis Service

By Property Type

Number of Properties

Number of Units**

Majority Independent Living Properties



Majority Assisted Living Properties



Majority Nursing Care Properties






By Campus Type

Number of Properties

Number of Units**

CCRCs (Must offer IL and NC)



Freestanding Properties (e.g., IL only)



Combined Care Properties (e.g., IL and AL)






By Care Segment

Number of Units**

Independent Living (IL) Care Segment


Assisted Living (AL) Care Segment


Memory Care (MC) Care Segment


Nursing Care (NC) Care Segment




“We’ve identified about 129 new senior housing facilities being built with an additional 58 expansion projects, for a total of 14,603 units starting construction in the past year, which in context is really quite a modest level of construction,” says ASHA President David Schless. “That’s about 32% less than what we saw the previous year, and down about 57% from two years ago.” Of those new construction projects, about 31% are classified as senior apartment product; 30%, independent living product; 20%, assisted living product; and 19%, nursing care product.

In the past year, reports Schless, Dallas was the busiest market for construction activity, followed by New York, San Francisco, and Chicago. However, “busy” isn’t what “busy” was three years ago. “The general themes are very modest levels of construction activity and, given the capital markets, one wouldn’t expect to see significant change in that right now,” cautions Schless.

As for occupancy trends, “we’re in a bumping-along-the-bottom phase,” suggests Michael Hargrave, vice president, NIC MAP. “Occupancy trends peaked in early 2007 and were about 92% in the first quarter of” 07. Since then it has been a steady march downward…but things seem to have leveled off in the past year.” Hargrave reports that while year-over-year rent growth has slowed to about 0.7% annually, it hasn’t “gone negative” like it has in other real estate sectors such as hotels, office buildings, and multifamily housing. Why? “Demand is growing again,” says Hargrave. “A demand-led recovery is what this sector needs in order to favor occupancy gains. Construction starts are running behind what we’re demanding right now.”

Lessons learned

Michael Hargrave
Bob Kramer
David Schless

Kramer describes operators as having a sense that “they’ve survived incredibly challenging conditions and they’ve learned a lot through that period of survival…listening to what the consumer wants and demonstrating value, which is critical in our sector.” He also notes that the successful operator has been able to differentiate his or her product and control expenses, which is obviously helped by lower turnover in the weak job market.

Kramer suggests the major questions are: “When will capital return,” “what will be the vehicles,” and “at what cost” because “the underlying criteria is lenders are much more conservative and there’s much more demand for equity, which in some instances favors experienced operators.

“This is a more difficult sector to just say ‘I’m a developer and I’ve done apartments before and I think I’ll flip over and do assisted living,’ or, ‘I’ve got this site and I think it’s great for independent living.’ It’s going to be very tough to convince any lender of that thesis. You’re going to have to show a track record in this sector. You’re going to have to show a major financial commitment or financial partners that are willing to put at least 25% equity, not including the land, into a project. And those are real barriers, in a good sense.”

Kramer suggests the most activity in the near future in the long-term care market will involve real estate investment trusts (REITs) and major operators. “The REIT structure may be a game changer with the impact it will have. It had a huge impact on the hotel sector. Capital is flowing to the REITs right now.

“I think the worst is over and there’s a very bright future ahead.”;

Long-Term Living 2010 November;59(11):42-43

Topics: Articles , Finance , Housing