Seniors Housing Business

FEB-MAR 2018

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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26 www.seniorshousingbusiness.com Seniors Housing Business n February-March 2018 By Jane Adler Markets with high barriers to entry are hit- ting the industry's sweet spot. Investors and developers are increasingly turning to dense infill markets amid concerns that the seniors housing sector is overbuilt. The calculation is that places where the development process is long and difficult will have less existing competition. Obstacle-laden locations will also act as a hedge against future competition. The result: a fast lease-up, and robust long-term returns. Developers and investors are seeking new spots in urban settings such as Manhattan, the Washington, D.C. area and Los Angeles, where little or no new seniors housing has been built in the past few years. Older suburbs with a large number of seniors are prime targets too. The strategy has kept new development alive, diverting developers from places that already have too much seniors hous- ing — a move that could help ease the supply overhang. "We love high-barrier-to-entry markets," says Max Newland, managing director of healthcare real estate at Kayne Anderson Real Estate, a private equity investment firm. Last October, Kayne Anderson purchased a former hotel building for $200 million in the trendy New York neighborhood of Brooklyn Heights. The firm plans to spend another $100 million to convert the property into a senior liv- ing community. "This is a poster child for a high-barrier-to- entry market," says Newland, whose office is in Boca Raton, Fla. In general business terms, "barriers to entry" is defined by the website Investopedia as the existence of high start-up costs and other obsta- cles that prevent new competitors from easily entering an industry. In real estate, the high- barrier-to-entry locations are typically situated in densely populated neighborhoods. Open land is unavailable. Assembling parcels is expensive and time consuming. Construction timelines are mea- sured in multiple years, not months. The phrase "patient money" doesn't begin to describe the fortitude needed by investors to withstand the lengthy wait for healthy returns. Also, the parcels tend to be small. The lack of acreage usually necessitates a vertical building design, which is expensive to build. A vertical layout with elevators can make it more prob- lematic for senior living operators to deliver services to residents. High costs demand high rents. That shrinks the pool of seniors who can afford the prod- uct, making a quick lease-up a potentially dicey proposition. Another hurdle: winning municipal approval to rezone land for a new use. Senior Lifestyle's proposed $79 million, six-story senior living building was recently rebuffed by the Village Board in Oak Brook, Ill., a suburb of Chicago with little seniors hous- ing. The Village Board said it preferred to have retailers that generate tax revenue in the mostly commercial area, despite the lack of demand for space among shopkeepers and restaurants alike. High risk, high return Barriers aside, the prospect of healthy returns is tantalizing. It's worth the effort, developers say, even though only about one in five high- barrier-to-entry locations may pan out. A successful strategy depends on the simple arithmetic of supply and demand, according to Ben Burke, president of Chicago-based CA Senior Living. The company is a developer and owner with 16 properties. Low barrier-to-entry markets with healthy population growth and high incomes have already been picked over, he says. Instead, CA Senior Living is concentrating on densely populated, high-barrier-to-entry sub- urban areas. The best places haven't had any new seniors housing built in the last five years, which makes a new building more attractive to potential residents. Other developers are less likely to follow because of the difficulty of building in the area, says Burke. Several months ago, CA Senior Living broke ground on a seven-story project in Englewood, Colo., an older suburb just south of Denver. The facility will feature 130 high-end units of Why Urban Development Is in High Demand n Development Developers, investors increasingly seek high-barrier-to-entry markets to inoculate themselves against overbuilding. Above, a sketch shows the future lobby of The Watermark at Brooklyn Heights, an old hotel that is being converted into a luxury seniors housing property in New York City. Below, an exterior view shows the building as it looks today.

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