Aegis Adapts to Shifting Development Landscape, On Track to Double Portfolio Size

The Covid-19 pandemic has created impediments to development, but Aegis Living is still on track to double its portfolio size within a decade.

The Bellevue, Washington-based assisted living and memory care provider currently has 32 communities in operation and eight under development. So, about three communities need to be added each year for the next 10 years to reach the goal.

“I think it’s still achievable,” Walter Braun, senior vice president of development, told Senior Housing News. “The company is focused on it. I’m focused on it.”

But to meet his objective, Aegis is adapting to a changing development landscape. Current challenges include a tight lending environment and barriers to entry that are making urban projects increasingly difficult.

New opportunities are on the horizon, however, including the potential to secure prime real estate as the hospitality and retail industries struggle. And, Aegis is benefiting from its design-forward philosophy, which led the company to create buildings with many features — such as large common areas and well-integrated indoor and outdoor spaces — that are more attractive or essential in light of Covid-19.

Pandemic challenges

The rise of Covid-19 last spring caused setbacks for construction projects of all types across the country, and Aegis’ senior living pipeline was no exception.

The company had four projects under construction at the time, located in Washington state. The governor mandated a shutdown of construction sites, prompting Aegis to apply for an emergency waiver, which was granted. Still, the pause created delays and led to increased costs; these impacts varied from project to project.

Depending on the site, projects were delayed from around three weeks to roughly seven weeks, with costs ranging from minor in some cases to a bit more than $500,000 at the high end, Braun said. 

And while construction is back underway, the pace of projects is still affected by Covid-19. For example, going through the proper health screening can take about 30 minutes per day per worker. For a site that might employ 50 workers, “that’s a lot of man-hours,” Braun noted.

To address this challenge, sites are turning to timed entrances for different types of subcontractors, to prevent bottlenecks and minimize lost time. Generally, Aegis’ contractors have been good partners in this difficult period.

“People are conscious it’s not our fault, either,” Braun said, referring to the delays and complications caused by the pandemic. “They’re not trying to gouge us.”

If all goes according to plan, Aegis will open its next new building in March 2021, in the Overlake area near Seattle. This will be followed by the July 2021 opening of a building in Kirkland, Washington; the October 2020 opening of a community in Lake Union, Washington; and the March 2022 opening of a property in Greenwood, Washington.

The pipeline is rounded out by two projects that are permit-ready and two that are in entitlements. The most recently added project is in the Lake Hills neighborhood of Bellevue, where Aegis acquired a site that a different senior living provider had previously entitled, Braun said. That provider opted to build on a different site in Bellevue, opening the door for Aegis, which acquired the land and is seeking to modify the entitlement.

In addition to expanding its footprint in Washington, Aegis is eyeing the West Coast for expansion. One of its permit-ready projects is in San Rafael, California — a town in Marin County, north of San Francisco.

While further Golden State growth is in the cards, developing in California comes with a slew of challenges, Braun noted.

Aegis has historically targeted urban locations for its communities — a development strategy that has gained in popularity across the industry in recent years, as people of all ages have gravitated toward live-work-play environments that have easy access to transit. While such locations usually have high barriers to entry, these barriers are particularly extreme in California. 

Affordable housing requirements, parking requirements, and mandates governing what kind of building materials can be used all add significant costs to projects in California, Braun noted. In one instance, meeting the affordable housing requirement in San Jose would have essentially added a $1.8 million fee to the project.

“Those are things that start making these projects infeasible,” Braun said.

As a result, Aegis is starting to explore suburban locations where the company can employ wood-frame construction and surface parking.

Perhaps the biggest roadblock to new development at the moment is the difficulty of obtaining debt financing. Banks and other lenders essentially turned off the spigot as a result of the pandemic; this is understandable, as they face difficult circumstances, including potential mortgage defaults from hospitality and retail clients, Braun said. In instances where lenders are willing to provide financing, their terms have become less favorable than they were before the pandemic.

Aegis decided to pause its two projects that are ready to obtain building permits. The plan is to restart them by next March, by which time Braun is hoping that a Covid-19 vaccine will have been developed and the lending environment will have rebounded.

Opportunities on the horizon

Despite the challenges posed by Covid-19, the pandemic has also opened up potential new opportunities and reaffirmed the approach that Aegis takes to design and operations, Braun said.

For example, the community slated to open next March in Overlake took the Bellevue arboretum as a design inspiration. The center of the U-shaped building will be a glass-enclosed greenhouse, and connection with nature will carry through to various other aspects of the design. Aegis has spent close to $250,000 to bring this biophilic vision to life, Braun said — but that investment could be particularly worthwhile in light of Covid-19, which has created more urgency than ever around giving residents a connection to the outside world.

While the Overlake building is a particularly dramatic example, Aegis is committed to biophilic design throughout the portfolio, given the mounting evidence that connection with nature has healing and calming effects, Braun said.

Furthermore, Aegis communities typically have generous common areas, with net rentable space of less than 50%. As a result, the designs are well-suited for supporting socially distanced group activities. In this vein, dining rooms are designed to accommodate 120% capacity, which gives the operational team the space needed to adapt the dining experience for current — and future — infectious disease challenges. And Braun estimated that about 95% of resident units have air circulation systems that are not connected to the building’s central HVAC system, which also is helpful from an infection control standpoint.

Aegis is making some adaptations in its designs in response to Covid-19, including installing REME in-duct purification systems that activate hydrogen peroxide molecules to “clean” the air. Sanitation systems are also being evaluated to enable more frequent surface disinfection.

Creating buildings with a strong technology backbone has always been a priority for Aegis and is even more important going forward, Braun emphasized. He believes that having strong WiFi to support a variety of integrated systems — including voice-enabled technology, medical records, telehealth and video communication — is the “wave of the future.” But, he cautions that senior living will remain a “human touch” industry.

“The danger I see with technology is that people will rely too much on it,” he said.

While building design plays a role, operational practices are crucial to effective infection control, and Braun points to the rigorous efforts that the Aegis team has put into place over the last several months.

“I’m excited with how the operating side has behaved, and allowed us on the development side to still make certain projects pencil and look at future opportunities,” he said.

Those opportunities could stem from the pandemic-related woes that are besetting the hospitality and retail industries.

In California, assisted living and memory care communities are classified as commercial properties, not residential, and hospitality and retail typically are the major competitors for commercial real estate, Braun noted. With those two sectors hurting, Aegis anticipates being able to pick up some quality sites in the Golden State.

“We’re trying to understand the market and how retail is being impacted,” Braun said.

Since the early days of the pandemic, developers have been eyeing hotel-to-senior living conversions.

“We’ve looked at that, but they’d have to be very unique hotels,” Braun said. “You can’t convert a Motel 6.”

That is, a conversion works best with a physical plant that includes a full commercial kitchen, dining room and amenity spaces, and hotels that include these features tend to be more well-capitalized than mom-and-pops. But if older, smaller hotels do shutter due to Covid-19, this could present another chance for Aegis to acquire good real estate at an attractive price.

Braun is also cautious about another rising trend in senior living: communities developed to serve niche demographic groups. Aegis was a pioneer in this area, with communities tailored for the Chinese community in the Northwest. Making these communities successful is a challenging proposition, and demands that a provider have a clear understanding of the cultural values of the group being served. In Aegis’ case, the team even took a trip to China before opening the buildings, and still the projects were “difficult to pull off,” particularly given the norms around caring for older family members at home, Braun said.

Covid-19 has caused heartache for people within Aegis and across the country, but from a purely business perspective, Braun is engaged by the challenge of rising to the moment while forging a path forward.

“Life is a little more stressful but also more exciting,” he said.

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