“Roll up your sleeves; look at the market. The market drives everything,” shared Joe Mulligan, managing director at investment bank Cain Brothers. While senior housing investment is currently enjoying some of the real estate investment spotlight, a recent whitepaper by Plante Moran, published by Senior Housing News, discusses the signs that should signal investors to proceed with caution. Much like traditional real estate investing, senior housing requires due diligence. Here’s what you should be considering.
Impact of Aging on Building Code Requirements
The average age of individuals making the move to assisted living is 87. That’s up from 80 in 2001. With the age increase we’ve seen a growth in the chronic conditions of residents. With this rise in acuity, investors need to understand its impact to building code requirements.
While Independent and assisted living facilities are typically required to uphold I-1 codes, communities that require skilled nursing are required to meet I-2 building codes. The authors of the Plante Moran whitepaper discuss the need a resident may have to move from assisted living to skilled nursing. If they wish to stay in the same room or unit, that room must meet the I-2 code requirement. If you, the investor, must reconstruct the room for I-2 status, your bottom line may take a hit.
Would it make more sense to expand to the I-2 code from the get-go? Likely so. Many facility operators are taking that exact approach. Timothy Dressman, vice president of business development with CHI
Living Communities, a subsidiary of Catholic Health Initiatives put forth this idea: “If it is an assisted living unit or assisted living resident, they can either remain in that I-2 room when they become skilled or [you] can easily change licensure from assisted to skilled in the same building without having to reconstruct everything to higher acuity code.”
Senior Housing Market Saturation
Overbuilding of senior housing nationwide has impacted occupancy rates, with average levels below 90 percent. That is 190 basis points lower than the cyclical high. Homework in your market will be required to confirm it is not oversaturated before you invest.
Low occupancy and fill rates are a red flag for investors. Mulligan suggested fill rates of three to five units per month may indicate a non-saturated market. You should likely take a pass on properties where the market has fill rates lower than that benchmark.
The whitepaper goes on to outline these market fundamentals to research:
• Penetration rates
• Distressed assets regularly changing hands
• 45- to 64-year-old caregiver demographic trends
• 10-year growth trends for 65 and older, and 75 and older age groups
• Median income of the senior and caregiver
• Housing values
• Net worth of age and income qualified seniors
Remember though, a lot of development does not necessarily equal market saturation. Cities in Texas, along with western Michigan and Pennsylvania have a lot of construction happening now or have developed in the past what seemed to be an unnecessary amount of senior housing. Those markets all have full occupancy.
Dressman shared there are some operators willing to take on the risk of low occupancy rates due to a “Grey Boom” on the horizon. They are the ones building in anticipation of demand.
Unrecorded Liabilities on the Rise
“You have to get on the ground and take a firsthand look at that property before you move forward,” Dressman said.
There are obvious reasons to visit a community you may invest in, like planning for necessary renovations. However, you will also want to consider factors while you are onsite that could point to unrecorded liabilities, such as workforce concerns or federal tax issues. According to the whitepaper, staffing shortages represent the biggest undisclosed warning and points to temporary staffing agency turnover as a leading indicator.
Agency turnover could be a result of troubled operations or matters of concern with the actual community. Issues of that kind can result in inability to retain staff. Also consider the proportion of Medicaid to private-pay residents. Dressman shared that facilities with a significant portfolio of Medicaid residents may struggle financially.
Deferred Maintenance and Your Bottom Line
The Plante Moran whitepaper defines deferred maintenance as the practice of delaying or ignoring building upgrades.
Potentially a hidden liability, you need to factor the impact of deferred maintenance into your business plan. The surface items, like paint or new tile, should not impact your bottom line too drastically. However, big-ticket expenses like new technology or even a roof should be considered in your evaluation of the deal.
If extra dollars are needed for renovation, you need to plan for that going in. Maybe you can negotiate a lower price if the investment is still feasible – meaning you can recoup your renovation capital in a timeline you are comfortable with. If you cannot see a return on the horizon, you now know this deal may not be right for you.
Due diligence is as important when investing in senior housing as any other real estate sector. Choose the deal that fits your level of tolerance and know your market. With the impending boom of seniors, it could be a great time to invest in senior housing. Just make sure you have done your research to pinpoint red flags and avoid pitfalls.
Receive thorough, objective, and reliable research and analysis from Platinum Commercial Holdings. We can help you with the extensive due diligence necessary to determine if a market is right for you.