With new construction starts near record lows due to the state of capital markets and the cost of materials, senior housing operators – including Atria Senior Living and Presbyterian Homes and Services – are being strategic about how to renovate, reposition and expand.
Along with these struggles related to costs, cities and municipalities have been showing more pushback to senior housing projects, resulting in longer development timelines.
When Presbyterian Homes and Services has proposed new projects over the last two years, no city officials have initially responded with enthusiasm to the notion of more high-density housing, according to Jon Fletcher, senior vice president with Senior Housing Partners, the development arm of Presbyterian Homes and Services.
“Not to say that was easy before, but it just seems like the door is outright closed, and it’s taking a significant amount of work and effort from our developers to get through that,” Fletcher said.
With the added difficulties, the average approval and titling process has jumped up from an average of six to nine months up to around two years in some cases, according to Fletcher, which has led to a general slowdown in the number of new projects being built. Presbyterian Homes and Services was averaging seven to nine new projects per year several years ago; that number has since dropped down to an average of three to five.
“Our run rate of the last couple years is probably about half of what it was three to five years ago,” he said.
Despite the challenges, developers and operators are finding new ways to focus their efforts, including renovating older communities that are in need of updates while finding new ways to keep growing in order to keep up with demand.
“It’s been difficult, but aside from [the financing environment], there’s a lot of opportunity out there,” said Kristen McCulla, vice president of integration at Atria.
Fletcher and McCulla delved into topics that will be further explored at SHN’s upcoming (RE)BUILD conference, taking place Nov. 20 and 21 in Chicago. Learn more about the event and purchase tickets here.
Renovation focuses
While new starts are difficult to get going at this time, renovating older communities and campuses is seen as worthwhile to bring them up to modern standards.
Louisville, Kentucky-based Atria Senior Living – which operates more than 300 communities across the United States and Canada – has implemented a programmatic capital planning initiative (PCPI) to renovate the communities in its Holiday by Atria portfolio. McCulla said by the end of 2025, the program will have renovated 150 communities over the span of three years.
“Much of the Holiday portfolio came to us with minimal, if any, first-impression capital investment, in some cases, never [having been renovated] since opening for 20 or 30 years,” McCulla said. “So they were pretty dated, and some of them still are.”
For renovation purposes, parts of the portfolio are grouped into templates due to having similar sizes and structure, which has helped with the PCPI. With renovations being completed, McCulla added that the communities are better set up for success.
One major focus in the Holiday renovations has been adding in more flexibility, particularly in common areas, allowing the communities to be better prepared for the incoming boomer contingent.
“We are trying to convert existing common areas to be more multifunctional, so a multi-purpose room [or] a community room that can be used for religious services or streaming lectures or watching movies,” she said. “Variety is what we’re going for.”
Other renovations for the independent living portfolio help ensure having good home health partners and rehab offerings by finding spaces for them to rent in the communities. Doing so helps with the portfolio’s middle market focus and allows for additional affordability by enabling health care accessibility without adding steep operating costs. The multifunctional spaces being added in also have uses for physical activities, such as yoga classes, which brings a wellness factor to the communities.
Presbyterian Homes and Services, which is based in Minnesota and has a portfolio of more than 50 communities, including more than a dozen life plan communities, has been spending between $20 million and $25 million on reinvestments and renovations across its portfolio per year. At times, some of those renovations include adjusting the product type. One example is The Wellington, a community the company recently acquired and changed to independent living from assisted living.
On an average, the nonprofit has been completing between six and eight whole- community renovations per year.
When selecting what needs to be renovated, Fletcher noted an amenity change with a high return on investment comes in the form of additional storage in units.
“Instead of having smaller three- by- three or five- by- five storage units that we’re renting out for $50 or $100, if we put that space into a unit, I can charge the same purchase price per square foot,” he said.
He also flagged a strong ROI from adding more electric vehicle charging stations, which has helped drive occupancy. The organization has converted 10% of its parking stalls to accommodate electric cars.
Atria’s renovation focuses largely revolve around the resident experience and common areas, but McCulla emphasized the importance of renovating living units in terms of driving ROI, given that renovated units can attract new residents and also command a higher rental rate.
Additionally, Fletcher said outdoor spaces cannot be ignored when renovating a community.
“They really need to be paid attention to, and specifically … covered outdoor spaces … those spaces are so welcomed by residents, their family and their friends,” Fletcher said. “We shouldn’t cheap out on those spaces.”
The need to grow
Senior housing occupancy is nearing the peaks seen in 2020 prior to the Covid pandemic, but supply is failing to keep up with the coming demand, a fact only worsened by the current costs of materials. Because of this, operators are having to find ways to grow creatively.
McCulla said that is coming in the forms of partnership talks and programming refinement to be ready for the incoming baby boomers.
“I think the resident base who’s coming in today is even different than a few years ago,” McCulla said. “So we have to continue to respond to and keep them content so they bring their friends in, and the pipeline continues to fill up those communities.”
Fletcher said while he is comfortable with the incoming demand for the next 10 to 15 years, Presbyterian Homes and Services is looking to get ahead by shifting its focus to the labor that will be needed to care for those residents, along with diversifying the products on offer.
An example of this, he said, could be a product that is lower acuity and requires less staff to maintain. As a result, Presbyterian Homes and Services is looking at its existing campuses for where the organization can add independent living components.
“It does just seem that, especially on the nonprofit side, we do just still have an overweighting of assisted living in particular compared to what the actual need is,” Fletcher said.
He believes that assisted living often pencils out attractively on a pro forma, but labor availability proves to be tighter than anticipated after the community opens. Over 50% of market research at the moment should be focused on where workers are coming from, in Fletcher’s view.
As they consider the senior living community of the future, Fletcher and McCulla are particularly interested in a few innovative approaches.
McCulla is drawn to multi-use developments that combine senior living with multifamily apartments that are age-restricted, and amenity spaces open to the public.
“I think the more we can bring the public into what we’re doing, the more understanding that they’ll have of what the industry offers and how it can benefit them and their loved ones in the future,” she said.
Fletcher sees appeal in communities that require some level of resident volunteerism – say, 10 hours a month – as a condition of lease agreements. Scaling that across different communities and residents at different life stages could be difficult, but the operational efficiencies and resident wellness benefits are potentially great, he said.
Operators and developers are also being particularly strategic about where they are wanting to bring new developments.
Presbyterian Homes and Services is looking more to the Midwest and the Sun Belt for development, including states such as Indiana, Missouri, Tennessee and Texas, due to an easier time of getting projects in the ground with less effort required from a licensing standpoint compared to markets with high barriers to entry such as California or New York. Atria, on the other hand, has favored such markets for recent projects.
Developing in such markets is indeed a “long and painful process,” McCulla said, but part of Atria’s growth strategy has been focused on accessing the affluent demographics in these locations.
“So, we’ve opened buildings in San Francisco and the New York Hudson Yards recently; both of those would fall into the category of difficult areas to work, but in our view, in those cases at least, worth the effort in the long term,” she said.
She and Fletcher agreed that wherever senior living providers are aiming to grow, now is the time to get the plans and pieces in place for development projects. That’s because demand is ramping up, supply is down, and interest rates could start to decline in the near future.
“The reality is that if interest rates come down, we all know that there’s a bunch of projects that are just waiting to jump back into the marketplace,” Fletcher said.
Presbyterian Homes is trying to get projects as close to permit-ready as possible, in order to move on them within 60 to 90 days of an interest rate cut.
“If you’re waiting for interest rates to come down to start developing a project, you’re too far behind,” he said.
