Achieving alignment among senior living operators, developers and capital providers requires creativity in dealmaking and an emphasis on transparency.
Operators and their development and equity partners are optimistic about the prospect of new growth and closing the industry’s “supply gap” by way of new construction in 2025, but to achieve those plans, many will have to work closely with capital providers and traditional lending sources.
“As long as you are keeping people from the operations side and the capital side together from the beginning, that’s certainly helpful to get projects out of the ground,” said Ziegler investment bank Managing Director Eric Johnson during a panel at the recent Senior Housing News ReBUILD conference in Chicago.
Finding alignment requires creativity, communication
To cut through some of the current challenges to senior living development, some operators have more closely aligned with their capital providers. Others have branched out to partner with new ownership groups to achieve their growth goals. Both are viable strategies provided the partners can work in lockstep.
Leaning on past capital relationships, constant communication and transparency around operating performance have helped operators, developers and capital partners find alignment.
Experience Senior Living, an active developer and senior living operator, is in the midst of a six-community development pipeline with projects at varying stages. One challenge for Experience and others is the fact that operators have had to accept steeper underwriting terms from lenders in order to start new plans.
“We’re just trying to change the way that the industry looks at senior housing,” Experience Senior Living President Phill Barklow said.
Image Courtesy Merz Photography on behalf of WTWH MediaSome of Experience’s recent growth, including communities in Florida, Colorado and now in the Washington D.C. metro area, have seen extended development timelines.
After Experience launched in 2022, the operator faced challenges convincing traditional capital partners and banks to come off the sidelines due to challenges in lending and new development. Experience worked with the NexCore Group, the Colorado-based operator’s parent company, to bring “non-traditional” partners to the table in order to make a deal.
The company worked with limited partner relationships, general partners and relied on “high-net worth individuals” to get projects started, Barklow told SHN.
“That trust built over the last 20 years [with NexCore Group] is really what kicked us off and made us successful and we continue to go down that road now of non-traditional capital partners on our new developments,” Barklow said.
Barklow said the operator and developer have become “overly-communicative” with its capital providers specifically around its plans for operations and growth.
This has led Experience to show a future development’s prospects to potential investors on projects that “target the end user” by providing data and market insights to potential investors.
“Targeting end users is critical for us and also it’s about aligning incentives all the way around and making sure that alignment goes through not just the capital partners but our investors,” Barklow said.
Project design, understanding extended timelines
To cut through some of the current development challenges, some senior living operators have changed the design of their communities to expedite construction.
Johnson referenced a project that Ziegler undertook with Distinctive Living to speed up construction and reduce costs with modular builds rather than typical ground-up development.
Image Courtesy Merz Photography on behalf of WTWH MediaZiegler is monitoring deals for nonprofit senior living providers that also include changes to project design, from replacing typical wooden framing to cut down on lumber costs with light gauge steel frames.
With pressure on operators to complete lease-up quickly, amid inflationary pressures, the margin for error in achieving alignment remains tough for both developers and capital, Johnson added.
Barklow said he’s seen “thousands” of deals across the country in the last two years that were dead on arrival with unattainable return demands from capital partners.
“De-risking the deals means we have to make sure that they’re bulletproof deals and locations,” Barklow said. “It’s just a longer life cycle if you want urban core development and what most LP partners are looking for is bulletproof deals that get cap rate exits that are equivalent to multifamily.”
Capital partners involved in senior living have found some success buying distressed assets and turning them around rather than building anew.
Johnson said Ziegler was watching construction and development timelines take 18 to 24 months for construction and then another 18 months minimum to achieve stabilization.
“If you can buy stuff at half of the replacement cost, then you have to be paid to take that extra risk to get construction out of the ground,” Johnson said. “We’re seeing more of the co-GP role or groups are coming into the space that aren’t as familiar with senior housing so they want a bit more control going in.”
But achieving growth through distress-driven deals isn’t an easy path, either, as struggling communities come with a host of operational challenges and require lean operating models to find stabilization after a property changes hands.
From updating the community with capital expenditures (CapEX) to updating lifestyle and programming offerings, lenders want to see an operator’s past track record before turning the keys over on a new building, Johnson added.
But for Experience, Barklow said ground-up development was the “only way to go” forward in primary, urban markets as prospects demand more lifestyle amenities, intergenerational concepts and access to things like public transportation.
“We see the customer of the future that’s here right now and we feel that we’re lacking in the market already,” Barklow said.
In today’s senior living lending environment, Johnson said Ziegler was seeing deals come through that were more conservative than in past economic cycles, given the extended two-to-three-year timeline it takes to build new.
With that conservative approach, Barklow said the senior living has seen “misalignment” as capital partners are trying to lessen risk of a senior living asset. That could mean partnering with a vertically-integrated senior living developer and operator, like Experience, to fuel growth rather than bringing an operating partner in towards the end of a deal.
“They want to do it different, so having the alignment of making sure that we’re developing the best products in the best location with the best design, resources and amenities, it’s easy to get [capital] over that hump of not just focusing on returns and let’s do the right thing for the clients,” Barklow said.
Finding alignment also relies on educating investors who aren’t familiar with the challenges facing operators and on the broader factors that differentiate senior living properties compared to its multifamily and commercial real estate counterparts.
“There’s a real estate component of it which is very important but you have to have the right teams to operate in the communities and part of that is the educational process with our investors,” Barklow said.
Looking ahead to 2025, Johnson envisions a “slow go over the next year” for senior living development and investment, but positive momentum in the form of interest rate cuts could bring more lenders off the sidelines. Barklow echoed Johnson’s cautious optimism, noting that favorable deal terms could come in time as rates improve.
“I think we’re starting to see the capital markets move and defrost a little bit so there’s enough for everybody going around and so I’m hoping new development continues to be on the rise,” Barklow said.