In our Q2 benchmark report, we expressed “cautious optimism” about the senior housing market moving forward based on the data points we pulled. This month, we take a deep dive into construction. We spoke to five people in the space to get a sense of what’s on the horizon for senior housing.
While they all cited pandemic-related labor shortages and supply chain issues, they were generally optimistic about the industry’s future.
As Matt Sayre, VP of Construction, Senior Living at Ryan Companies put it, “We view COVID as a speedbump on a long road.” After all, as he noted, the demographics and demand for senior housing aren’t changing. Here’s what Sayre and the other folks we spoke to are seeing.
1: Flexibility and Adaptability for Changing Acuity Levels Are Essential
All five people we spoke to emphasized the growing importance of flexibility and adaptability in new construction.
Sayre noted that there’s a push toward letting residents age in place within a community. One example he highlighted: new communities licensing the entire building for assisted living.
“Even within a community, the transition from one care level to the next, typically from independent to assisted living, can be very difficult for both the resident and their family,” he said. The goal for new construction is to be able to accommodate residents’ changing needs after move-in.
At the unit level, this may look like designing spaces that can adapt. “Independent living units might have a full kitchen, but if the community needs to convert a floor or wing to assisted living, they can easily replace the full kitchen with a kitchenette or additional cabinetry,” said Jamie Timoteo, Principal at Plante Moran Living Forward.
Or else the unit might contain an island that can be moved to a different part of the room so the resident can bring their dining table when they move in.
Jason Jorgenson, SVP / Managing Director – Development with LCS, agreed that adaptability is huge in new construction right now.
“Another biggie is flex space,” he said. “To plan open spaces that can flex for social distancing and multiple purposes helps with cost and supports resident connections.”
He also noted that these trends and others weren’t necessarily new for most LCS properties. “A lot of what’s happening in response to the pandemic are simply good design concepts, like the household model and a connection to the outdoors, which we’ve been recommending for years,” he said – a reassuring comment for those looking at the future of the space.
2: Pandemic Safety Features Are Here to Stay
In the category of pandemic silver linings: the folks we spoke to agreed that the safety features senior living communities have added since the start of the pandemic aren’t going anywhere, meaning new construction in the space will be better suited to maintaining resident and employee health and curbing future outbreaks of illness.
As Timoteo noted, “COVID-19 will always be around in some form or another – it’s just going to continue to mutate. Or there will be a new virus altogether. The industry needs to understand this and incorporate designs that minimize the spread of disease.”
Plante Moran’s clients, for example, are incorporating…
- Hand-sensor technology so people don’t have to touch sinks and handles.
- Key fobs that allow no-touch door entry.
- Contactless appliances in public restrooms.
Developers are also looking for ways to increase outdoor access and add more outdoor spaces.
“Even in Minnesota, we want to make sure residents always have access to outdoor living,” says Sayre. “And we don’t want them to have to move very much to get outdoors or visit high-amenity areas.”
As Jorgenson put it: “The big question right now is: how do you restore confidence in any communal environment? That’s true everywhere, but it’s especially important in senior living, given the vulnerability of the population.”
Among the solutions LCS has found are improved indoor air quality strategies, which will benefit residents not only through the end of the pandemic but also for every flu season to come.
Of course, the equation is trickier for more infill markets, which have less space overall and fewer opportunities to incorporate outdoor space. But, says Tom Mathisen, SVP / Managing Director – Development with LCS, “developers are finding ways to engage the outdoors even when they have limited space.”
He notes that LCS still believes those infill sites will do well in the long term, despite last year’s general exodus from urban areas.
Of course, getting all these features to market is somewhat challenging right now.
3: Supply Chain Issues and Rising Materials Costs Drive Up Costs, Slow Completion
Construction costs continue to soar. But, as Sayre pointed out, rent isn’t trending the same way, meaning developers and architects are forced to be efficient in any way they can.
Crucial to understanding the big-picture cost increases is to understand that the problem isn’t limited to lumber costs, which got a lot of media attention when they reached record highs in May.
“Lumber prices have come back down, but now steel is at record highs and PVC is on the rise,” explained Timoteo.
In addition, according to Jorgenson, GCs are reporting longer lead times, meaning planning deliveries is key to avoid delays. Timoteo reported a similar experience: materials that might usually require six weeks’ lead time may now require four to six months to make it to a jobsite.
So how are developers coping? According to Brian Goodwin, VP of Project Development at Ryan Companies, early cost and conceptual models are key.
“We make sure our whole team is aligned between the owner, construction managers, designers, and developers,” he said. “That way, we can get subcontractor partners on board so they can forecast their workload, secure materials, and make sure they’re completing the project on time.”
He also mentioned turning to domestic sources for materials they used to source from overseas. “We try to be smarter about the materials we choose so that we can get good prices and avoid delays without sacrificing the look and feel for residents,” he said.
Jorgenson had a similar take. “Nobody wants to hold pricing for anything,” he said. “We’ve worked with our GCs to get prices locked as soon as we can for our clients to avoid escalation.”
One note we heard from more than one of our sources was that relationships helped: in a world of tight supply and long lead times, having contractors who have influence can translate to getting materials faster and getting projects done sooner.
So how long will this state of affairs last?
“I anticipate the same variability of the market in the months ahead,” said Timoteo. “We may see small reductions in pricing, but I don’t expect it to return to where it was last year. If anything, pricing will remain elevated for the next 18 months at least.”
“Senior Housing Has Always Been Resilient”
The senior housing industry is still grappling with the challenges COVID-19 presented. Timoteo acknowledged that some projects put on pause in the last 18 months may never see completion.
But, he said, “people who are diligent at measuring not just potential upside but also downside would underwrite with that downside in mind.” In other words, he said, “Sophisticated investors will be able to absorb these [pandemic-related] costs.”
Mathisen agreed: “The senior housing industry has always been extremely resilient. Senior housing in its current form isn’t going anywhere, but it will be tweaked. New products will be brought to market. Active adult is a good example: from a macro perspective, the outlook is fairly rosy if you examine the stats.”
Sayre noted that Ryan uses a very data-backed underwriting approach as to where and when it brings new products to the market. “We remain extremely bullish on the senior industry as a whole,” he said.
If you’d like more insights on the trends impacting construction plans in key areas, get in touch. We can provide you with a local market competition analysis.