Originally published in McKnight’s Senior Living
By Patrick McCormick
When it comes to one of real estate’s most attractive recent plays, senior living communities, grand does not equal good.
One of the most common features of the more dated buildings I see are sweeping staircases leading up from an opulent hotel-style foyer. It might seem impressive at first glance, but for investors considering buying the community, it should be a red flag. For more elderly residents, that staircase is a life-threatening tripping hazard that also could sink a company. And how are frail seniors meant to evacuate down those stairs in an emergency?
Many buildings with such features were designed in the 1970s and 1980s for the low acuity, social-care model of assisted living. Increasingly, however, they are unsuitable for the more intensive medical elements that are in demand today.
It’s one example of the pitfalls of investing in senior living communities that don’t show up on a spreadsheet. And such risks are being overlooked every day as the booming sector draws in new players who have scant experience in the space.
In just the past four years, 66% of the 1,303 new senior living communities in the United States were added by operators who had two or fewer properties in 2014. These operators often come from a real estate background of running multi-family buildings and are attracted by the potential for higher margins in senior living. They’re smart people, often know the area well, and understand its demographics.
The risks arise when they try to overlay their familiar business model onto senior living communities without understanding the unique requirements of the sector. Rather than staying in their lane and sticking to a business plan, they get distracted and reach for goals that aren’t feasible.
A common mistake for new investors is to think they can transform an “under-performing” community relatively quickly into a more profitable building oriented toward higher-acuity medical care. Although doing so may look possible on paper, it can turn out to be a much longer and tougher haul if the community’s infrastructure, culture and reputation are a bad fit.
Investors need to know what they’re buying into.
One key question that needs to be asked is whether a building has the characteristics that will enable it to be transformed into a viable asset long-term. The building may be functioning and earning a profit now, but that’s not enough. For example, do its units have the relatively large square footage and high quality that consumers expect these days? Plentiful new construction in the sector is raising standards and accelerating the obsolescence of older buildings, on top of adding competition.
Investors also need to understand the type and mix of residents they have. Moving from a social care model to medical care can’t be done overnight when you have a relatively healthy population that could be in their late 70s or 80s before needing more intensive care.
Staffing is another area that needs close attention. I’ve come across social care model facilities that employ only one nurse. That’s a risk for new investors because it means that the facility likely has become heavily dependent on the knowledge and predilections of one person.
Investors also need to make sure they understand the funding model they’re getting into. A community with more intensive medical care tends to have more complex funding streams, including managed care plans, which require more staff to deal with the associated documentation and billing.
Some undesirable aspects of communities are easier to fix, although are no less overlooked. One is the classic, old-school dining room layout consisting of trays and a buffet. Residents these days expect more than this. You may not be able to provide the menu-ordering that higher-end communities can, but viable ways exist to provide a less stodgy eating experience.
The culture of a building is another crucial aspect that never will show up in financial presentations. If a community’s activity room is full of arts and crafts supplies and little else, it’s a sign that the culture needs modernizing. These days, many more innovative ways exist to keep residents engaged and entertained as opposed to just busy. This isn’t necessarily an easy or quick transformation, however, because many residents may be reluctant to change, and staff members may be even more resistant.
All of this commentary isn’t meant to discourage would-be investors in the sector. And it may be some consolation to know that established players in senior living frequently make similar mistakes. The most important point is to go into a potential acquisition with open eyes and a willingness to learn what you don’t know about the industry.