With price points typically lower than independent living, active adult communities are a natural entry point for middle-market senior housing. But the property type has its nuances, and creating such a community can require a degree of creativity.
Just ask Frankie Pane, president and COO of Essex Communities, an Omaha, Nebraska-based operator that pivoted to rental active adult properties.
“You have to be creative at all levels in order to achieve extremely competitive rents,” Pane said during a panel discussion at the Senior Housing News Active Adult Summit, which was held virtually this year. “It’s not always cutting expenses, there are other ways to achieve better rent.”
The same is true for Greystar, which launched its own middle-market active adult brand called Album last year. By saving money through site selection and on operations, the Charleston, South Carolina-based real estate giant is able to achieve average monthly rents of around $2,000 a month in those communities.
“It’s a little less service-oriented and a little more affordable for the mid-market consumer,” Greystar Senior Director of U.S. Strategic Property Marketing Robin Craig said during the Active Adult Summit.
While they are still in their early stages, the Greystar and Essex Communities active adult models exemplify a growing movement among senior housing providers to reach the growing middle-market segment of consumers.
Making the math work
Both companies agree that numerous components are required to make middle-market active adult housing work at scale — but in most cases, doing so requires careful attention to detail during the planning stage.
While Essex Communities has targeted the middle market, the company traditionally used a buy-in model. When the financial crisis of ‘08 hit, “that really was a wake-up for, I think, many who use the entrance-fee model or co-op model in senior housing,” Pane said.
“We wanted to stay true to our roots and stay with middle-market, active adults,” he added. “So, we spent some time figuring out exactly how we can do that.”
Greystar is the largest multifamily apartment manager in the United States, and partnered with The Carlyle Group to launch and then rapidly grow its active adult brand Overture, which caters to the “upper-middle and affluent segments,” according to Craig.
But Greystar also noticed a segment of the population that desired lower monthly rates in exchange for fewer services.
“That’s really what initiated this mid-market brand,” Craig said.
To meet the middle-market segment, both companies landed on models that have cost savings built into the development and construction process — and it all starts with site and market selection.
For Essex, “any market is a possibility,” Pane said. That is exemplified in two projects that the company is set to break ground on: a community in Sioux Falls, South Dakota; and another just outside of Aspen, Colorado. While the markets are different, Essex’s methods and practices enabled the company to “still come in at a value price for what the area is,” he noted.
“In both cases, we will be the lowest in the market for rent rate for active adult [and] independent living, by far,” Pane added.
Essex also typically looks for markets and areas where occupancy rates are in the upper-90% range or near 100% across the board. From there, the company can determine its development costs and the expected rental rate.
“If we know as a new product … that we’re the best value, we will fill up quickly,” Pane said.
Regarding the way its middle-market active adult communities are designed and built, Greystar prefers projects with smaller apartment sizes and fewer floor plan varieties. The company’s planners also drill down into the details of value engineering, such as whether a community has surface parking, or whether a clubhouse is physically attached to another building on campus.
Essex also gets creative with developments where possible. For example, the company has built retail components into its past projects — and that is something Greystar has done, as well. Essex also sells certain units on the top floors of its communities as condos in a nod to its entry-fee roots.
“You use the sales price of those condos to help offset some of what you would ordinarily borrow, and then that helps keep the rent down,” Pane said.
Another advantage for Essex is the fact that the company handles its own development, construction and marketing functions in-house.
“We know that we’re not going to get hit by an outside [general contractor] who is profit-minded on a whole bunch of change orders at the end of a project — we can cost control,” Pane said. “As a matter of fact, in our most recent development deal that we’re looking at we came in $2 million under budget.”
Another big opportunity to hit the middle market with active adult communities lies in repositioning an older distressed property.
Essex has in the last three years undertaken six projects that started as acquisitions, and in each case, the company was able to acquire them at between a 30% and 50% discount to replacement costs.
“We then were able to infuse money in capital improvements to have a little bit of absorption cost during lease-up, and in every single case we beat projections.” Pane said. “We’re able to keep the rents low by having a lower basis when having a discounted purchase.”
Greystar is also targeting repositioning projects, as was the case with two of its recent Album communities. In both cases, the company was able to rebrand and remarket the communities, with occupancy growing as a result.
“We’re definitely seeing it being successful for those existing properties in our portfolio, or third-party assets that we take on to manage,” Craig said.
On the operational side, a middle-market active adult community from Greystar typically comes with fewer staff, activity programs that are driven by residents instead of activity directors, and no continental breakfast or onsite concierge services.
For Essex, staffing is one area of cost control. The company’s active adult communities are staffed with employees who resemble universal workers in that they can handle a few different responsibilities. For example, a maintenance person might help out with housekeeping, or an executive director might help with activities.
Essex similarly value-engineers its programming. For example, the company offers monthly housekeeping services as opposed to weekly or bi-weekly services.
“There’s the value proposition then of being able to say that you include the housekeeping,” Pane said. “But you’re not having to offset a staff person who’s just dedicated to doing that four or five times a month.”
As they look ahead, both Pane and Craig see ways to take the middle-market model to its next evolution. For example, because active adult communities resemble the independent living communities of 10 or 15 years ago, there may be opportunities to co-locate active adult with other property types to serve more residents along the care continuum.
There are also opportunities in co-locating a multifamily-style active adult building with detached housing. Essex is undertaking a project in Chicago that includes a congregate building surrounded by rental cottages and duplexes. Greystar is undertaking a similar project at an Album community in Scottsdale, Arizona.
“They seem to go off the shelf really fast when we start pre-leasing,” Craig said.
With a stable of fresh ideas and several projects underway, both Essex and Greystar are bullish on the future of middle-market active adult communities.
Greystar is planning to open its second ground-up Album community in September, with about five other projects in the company’s development pipeline. Overall, Greystar expects to undertake about six to eight Album projects a year, outpacing the development of its Overture and Everleigh brands.
Essex has one community slated to break ground soon and another five in development, and the operator is also mulling over a handful of acquisition opportunities. The company is also fielding many requests from other potential middle-market senior housing companies looking for consulting services, Pane said. But, he also had a word of advice for companies looking to get into the space.
“For anybody that … might be trying to come up from the multifamily arena, I think it’d be wise to partner with an experienced operator,” Pane said.
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