WEDNESDAY, MAY 27, 2009
by Mark ThomtonChicagoDemographics may point to a bright future for senior housing, but the economy is taking a toll on independent living facilities as many active seniors have seen falling home values and shrinking 401(k) plans negatively impact their own personal finances, giving them less money to spend on senior housing options.
"Independent living is a cruise ship without water," says Mark Myers, senior vice president investments and senior director, National Senior Housing Group for
Marcus and Millichap. "It is more for the go-go seniors, but if your 401k is now a 201k, you are probably less interested in the cruise ship idea."
A few years ago many seniors--and those approaching senior age-may have been eyeing cushy retirement villas as a place to settle down and relieve the burdens that home ownership can bring to those in their advanced years. However, a major hurdle to achieving this goal is often a high entrance fee. Many seniors were counting on the proceeds from the sale of their residential home to cover this cost.
Yet as the housing market crashed, many saw their home value plummet. Even if they were willing to take the financial hit, lack of demand and liquidity in the market made it difficult to find buyers.
As a result, occupancy at many independent living facilities has come under pressure and may continue to remain flat or decrease in the immediate future.
"Unfortunately for seniors, the downturn in the single family market has had a direct impact on their ability to finance a senior facility," says Jeff Raday, president of
McShane Construction Co. in Rosemont. "The senior housing market has been hurt. It is definitely feeling the downturn."
However, Raday does note that specialized facilities are still in demand, such as assisted living, dementia care and rehabilitation facilities. These, unfortunately, are a smaller portion of the senior living industry.
These specialized facilities are generally seen as recession proof. Economic decisions usually take a back-seat when family members see a loved one in need of specialty care.
"Assisted and nursing is doing better than independent," says Marcus & Millichap's Myers. "Assisted is need driven. Families usually won't avoid that option, because it could be deadly if they don't get in."
Rehab facilities have become a popular niche market for developers, too. McShane has recently entered into agreement with Regency Hospital Company to establish a rehabilitation hospital in Rockford.
"Long-term acute rehabilitation hospitals are in demand," says McShane's Raday. "They fill a niche from short-term acute care in hospitals to long-term in nursing homes. It can cut costs for insurance companies. It is very expensive to stay in hospital. This can cut costs by staying in short-term care rehabilitation before moving to a nursing home."
Another source of activity may come from government financing as the recent economic stimulus package has designated funds for affordable senior housing. McShane Construction is currently producing two affordable senior living facilities in the Pilsen neighborhood of Chicago.
"Some developers that may have gone to private financing in the past are now tapping into government dollars that are bolstered by the stimulus," says Raday. "Many of our clients are applying for HUD backed mortgages, which is good news. Those are favorable terms."
Raday does not expect many market-rate projects to receive assistance from federal funds. He also expressed concern over the government's ability to keep up with the amount of mortgage requests it will receive, possibly stalling projects even longer.
Leopardo Cos. is waiting for such a project to take place in Maywood.
"We are getting ready to start a supportive living facility, but it still needs to get funding," says Mike Leopardo, senior vice president of the firm's healthcare group. "The process is dragging slightly. The owners are waiting for the stimulus package."
Leopardo believes that government-funded affordable units will be a trend for the foreseeable future, but he is still optimistic about the long-term outlook. When the economy rebounds and demand returns, many facilities are in position to capitalize on the market.
"A lot of these senior housing campuses we work with have acquired a lot of property and have land available," says Leopardo. "They will upgrade in the future. There are firms out there that have one or two levels of care, but their goal is to provide every level of care. Once someone does get on campus, they can take individual all the way."
Marcus & Millichap's Myers is bullish on the senior housing market's future as well. He also believes that Chicago is particularly well situated to take advantage of this. While the Chicago area may not rank as high as Florida as a retirement destination, in a senior's twilight years it is common to relocate close to family. This is where Chicago has a distinct advantage as it is a major source of jobs.
"Chicago has benefited from job growth, because many seniors have adult children here who are pulling mom and dad back to the community," says Myers. "Seniors will go to Florida initially, but once they start to become ill their children will pull them back to Chicago so they can care and watch out for them."
The future may be bright for the senior housing market, but, like every other sector of real estate, financing will be different as the economy moves forward. The senior housing market was involved in some of the same practices and schemes as other asset classes and many of the investments that were made in the last few years are not playing out favorably right now.
"This market allowed non-recourse financing to someone who was buying a $3-4 million property," says Myers. "That was unheard of in the past. Securitization brought non-recourse to small loans. Now, we are back to local or regional loans that do have recourse."
More Articles
