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While the pulse of senior living development may have slowed in the last four years, recent plans and projects underway are an indication that senior living companies are not resting on their laurels in the meantime.
With projects now taking longer to complete and construction starts at or near a recorded all-time low due in part to tough conditions sourcing capital, senior living companies are betting that they can time the market with regard to new openings. I believe that the success or failure of these projects will entice more organizations to come off the sidelines in 2024 and 2025.
Projects underway in places like Washington, D.C., Baltimore, South Florida, and outside of Seattle are showcasing how companies including Watermark Retirement and Brightview Senior Living are growing for the future while executing on growth plans remains tough.
“We want to make sure we’re in the best position to hit go as the market allows us to do so,” Watermark Chief Investment Officer (CIO) Bryan Schachter recently told me.
The gap between inventory and incoming demand is widening. But by stomaching greater risk in the near term, I believe that operators focused on growth can still find ways to expand through new development, even in more modest terms than in the past.
In this week’s members-only, exclusive SHN+ Update, I analyze the current state of senior living development, including:
– Tracking some key projects and investment plans shaping the future of senior living development for the rest of 2024 into 2025
– How the Fed’s recent comments on a potential September interest rate cut could refuel the sector’s development engine
Pulse of development slow, but projects progress
It’s no secret that in 2024 the state of senior living development and construction is anything but active.
Preliminary NIC MAP Vision data showed roughly 1,300 construction starts in the second quarter of 2024, a level that is potentially a historic low number for the industry dating to the quarters before the U.S. financial crisis in 2008.
The time it takes for a new senior living community to be built from concept to completion is also now about 29 months, up from 21 in 2017, according to NIC.
Those conditions are leading to a potential senior living inventory “pinch” in the future, where demand greatly exceeds supply. Although that would have one effect of boosting occupancy, it would also intensify competition among residents for available units, likely leading to increased costs and potentially substandard experiences. That is not to mention the fact that operators would be leaving money on the table in the form of older adults who want to buy but cannot find senior housing to fit their liking.
The high cost of debt and construction materials is keeping many players on the sidelines in 2024, but some senior living companies have a greater appetite for risk with future demand in mind.
I believe operators that take action now to prepare new developments – from seeking land entitlements to necessary zoning and due diligence during a tough economic climate – will have a leg up on more cautious companies, provided their plans are successful.
This is the approach Watermark Retirement Communities has taken over the last four years, Schachter said.
The Tucson, Arizona-based operator recently announced an addition to a community in Bellevue, Washington, in partnership with Alliance Residential, and has projects in planning over the course of the next two years.
The company’s development pipeline specifically targets high-barrier-to-entry markets, like Southern California, where it can use its scale and relationships to its advantage while others are still spinning their wheels., he added.
Currently, the company has more than a dozen potential development projects on the drafting table. While not all will come to fruition, Schachter estimated “more than half” would get underway in the next 24 months.
A cursory glance at other companies’ plans show that Watermark is not the only company looking to grow now, even while growth is tough.
Also in the Pacific Northwest, The Springs Living is in its second and final year of construction on a 12-story, 150-unit community in Vancouver, Washington along the Columbia River.
On the East Coast, fast-growing Distinctive Living, having acquired Validus Senior Living earlier this year, has 16 communities in various stages of development, CEO Joe Jedlowski told me during a recent episode of the SHN Transform podcast.
The Freehold, New Jersey-based company is targeting future development in the “Southeast, Northeast, Florida, and areas outside the [Washington] D.C. beltway,” he said during the episode.
Confluent Development, which partnered with MorningStar Senior Living and Harbor Retirement Associates, has a $500 million senior living development pipeline in the works aimed at active adult and independent living properties. Matt Derrick, the company’s managing director of the senior housing development division, told me the company was forecasting 2025 as a friendlier climate for development.
“Our new mantra is: ‘Capital and courage,’ and it is going to take a healthy amount of both to navigate the process,” Derrick told me last year.
Projects are also taking longer to finish, so it’s imperative operators start sooner rather than later.
On the East Coast, Baltimore-based Brightview Senior Living is spinning up its next fund raise with a target goal north of $200 million to spur new development, having recently completed a 179-unit Baltimore County community.
Brightview plans to open up to four communities a year, with a “strong development pipeline that stretches through the next five-plus years,” Dollenberg said.
This approach of securing funds to spur new growth without a big investor or tougher financing terms could be a useful way forward for organizations seeking growth–with some more legwork involved.
With Watermark and Brightview both pursuing growth in high-barrier-to-entry markets, operators have chosen luxury senior living development to fuel growth. From low acuity offerings to memory care, operators are expanding luxe options.
Willow Valley Communities, which recently announced plans for a new memory care community inspired by the famed Dutch-designed Hogeweyk dementia village, aims also to develop a 20-story luxury active adult community in downtown Lancaster, slated to open in 2026.
Industry waits on rate cuts
Among the big limiters of senior living growth in the last couple of years have been interest rates that are higher now than in the recent past. On that front, signs are mounting that the U.S. Federal Reserve could soon cut rates.
Certainly, more favorable financing conditions are needed for the future of the industry, as there is compelling data indicating that a development surge is needed. Current penetration and unit absorption rates indicate the industry is on course to achieve a 90% average occupancy by 2026. Moreover, demand is projected to keep rising as the baby boomer generation ages.
However, the challenge lies beyond 2026, as the current development rates are insufficient to meet this growing demand. Without a significant boost in investments—at least 3.5 times the current rate—a development “supply gap” valued at $275 billion is expected to emerge by 2030, according to recent NIC MAP data projections.
But while this data tells a very clear story, it does not tell a very detailed one. As developers, investors, and operators prepare for the starting pistol to go off on the next big race to build, they need to be considering their strategies carefully in order to successfully capture the coming demand.
That means evaluating opportunities carefully on a market-by-market basis, including factors such as labor market conditions and climate change risk. Forging the right partnerships is also crucial in an era when standard ways of doing business – such as the 5% management fee structure – are becoming obsolete, and alignment more crucial than ever.
By preparing required zoning and development approvals during the current climate, operators that approach high barrier to entry markets with a specific target demographic in mind could set themselves apart from the field even with longer timelines required.
While long-form development might not be the most palatable compared to a swath of capex renovations, operators that prepare now may be the most effective in growing in the years ahead.
With interest rate cuts on the horizon, the competition in the senior living development sector is heating up. However, the true winners won’t necessarily be the ones who move the fastest, but those who find the perfect pace.
