The darling of real estate investors during dark times, is senior housing in danger of getting overbuilt?
When developers of the caliber of Tom Grape, Robert Larkin and Larry Gerber start to sound the alarm, it is definitely worth listening.
Grape is chief executive of Benchmark Senior Living, one of the most successful developers in the sector with a $1.4 billion portfolio. President of Senior Living Residences, Larkin has been in the business more than two decades, building a regional network of senior housing developments, from independent and assisted living to Alzheimer’s units. And Gerber is chairman and chief executive of powerhouse Epoch Senior Living.
Unlike most developers these days, this trio of industry leaders is not fretting about the dearth of financing. Instead, both are worried there may be too much money out there chasing marginal projects.
Think about that one for a minute.
“I do worry about the over-frothiness of the capital markets’ interest in senior housing,” Grape said at a recent panel discussion hosted last week by Boston/SF News.
Bubble Conditions
Amid the economic and real estate market turmoil ushered in by the Great Recession, senior housing has emerged as one of the few bright spots for developers. It has outperformed other real estate sectors, including the now-hot apartment market, according to the National Investment Center for the Seniors Housing & Care Industry.
While office developers are still not back in the game and apartment builders are just getting revved up, the strongest and most stable developers in the senior housing sector kept on building.
Interestingly, assisted living has been the sector’s most robust segment. And it’s no wonder, given that it’s medical needs, and not the ability to cash out with the sale of your home, that determines when seniors make the move.
But now the field is starting to get a little crowded. Developers who couldn’t tell the difference between a nursing home and assisted living complex are suddenly pouring in, in the belief that if they build it, the seniors will come. Massachusetts has averaged three or four new assisted living/senior housing complexes a year, but suddenly 20 are on the drawing boards today.
And some of the stories of inexperienced developers sound downright scary.
Déjà vu All Over Again
Larkin said he recently got an eye-opening call. In a speculative gambit, the developer – new to the field – went ahead and designed and built an assisted living complex, and he wanted Larkin’s help managing it and filling it up with seniors, Larkin recalled with a shrug.
While that might cut it in the apartment world, it is a recipe for disaster when it comes to senior housing and especially assisted living.
If you build it, they won’t necessarily come. Slick marketing pitches just won’t cut it. Instead, only careful market analysis – and by that I mean analysis of demand within a few miles of the proposed facility – will reveal whether a location that might look great, truly is.
“You can fix a marketing problem, but you can’t fix a location,” Grape said.
If you’re in the real estate business or have followed it, this all may sound very familiar.
Back during the tech bubble, everyone wanted to build a “telecom hotel.” Predictably, we soon wound up with a telecom hotel on every corner, including the Boston Internet City, which has gazed, vacant and empty, for years now onto the Turnpike from its Brighton perch.
Then everyone and his brother wanted to build luxury condos, flooding downtown Boston with units and seeing other builders try to take the concept to Natick and even a desperate Rhode Island mill town.
The W Boston declared bankruptcy and other new towers sat half-empty for years.
Developers too often act like copy cats, scrambling to jump on the latest hot trend before the rickety ladder of market demand comes crashing down.
Alluding to this rather irksome pattern, Grape summed it up nicely.
“We’ve seen this movie before,” he said.
Yes, we have.
Scott Van Voorhis can be reached at sbvanvoorhis@hotmail.com
