New models of active adult communities are taking root across the country as the product type surges amid the pandemic — and capital providers have taken notice.
Financing markets have evolved in recent years to meet the needs of active adult developers and investors just as the industry has evolved to meet the needs of today’s active adult residents. And now many of them are more bullish on the product type than before the pandemic, according to Livingston Street Capital CEO Peter Scola. Livingston Street is a private equity firm focused on commercial real estate that entered the active adult space about two years ago. Currently, the firm has about 1,000 active adult and independent living units spread across six communities in addition to its industrial and office holdings.
“We’ve seen more development from the ground-up of active adult communities, and more acquisitions,” Scola said during a panel discussion at the recent SHN Active Adult Summit, which was held virtually this year. “We’ve watched the lending market grow in kind, with securitized lenders and balance sheet lenders now starting to evolve and grow in their understanding of the sector, and therefore have much more willingness and much more liquidity [to lend] to the sector.”
JLL Managing Director Zach Bowyer has also seen much more interest in the space from investors and lenders in recent months. In the past, JLL completed about 100 market studies for clients each year, with anywhere between 5% and 10% relating to active adult.
“But right now, if you look at what we have on our books, maybe 10% to 30% of our market study work is for active adult,” Bowyer said.
Before the pandemic, Freddie Mac focused on the more traditional independent living, assisted living and memory care projects, and the lender financed more than $4 billion for senior housing in 2019. But with Covid hitting in 2020, that volume was cut essentially in half, according to Kathleen Ryser, senior director of seniors housing underwriting and credit at Freddie Mac.
Fast forward to today, and the lender is now more eager to invest in the active adult sector and is making liquidity available for it.
“I think it fits very nicely with not only our liquidity, but our affordable mission, as well,” Ryser said during the panel. “[We’re] pretty optimistic on this space.”
A strong pandemic showing
It’s no secret that cap rates sharply rose for all senior housing product types during the pandemic as valuation became tougher. Fast forward to July 2021, and senior living appraisers are still seeing volatility in pricing. But cap rates have started to come back down — and with active adult cap rates falling faster than other product types.
“Coming out of the pandemic, we’re probably seeing active adult [cap rates] compress at faster levels than more traditional senior living,” Bowyer said.
The performance of active adult communities relative to the rest of the senior housing industry has also caught investors’ eyes. In fact, looking at the property type’s collection rates, “you wouldn’t know there was a pandemic,” according to Scola.
Livingston Street typically is 50% to a maximum of 60% loan to value/loan to cost across its portfolio, and he believes that the current environment creates a competitive advantage for firms like his that deliver a “substantial amount” of equity.
“I think that’s going to be more and more of a requirement because cap rates have progressed to a point where lenders on their last dollars have, we’ve seen at least, cut back, because of their underlying basis based on a lower cap rate and higher acquisition costs,” he said. “So it’s kind of an interesting time right now where the ability to be underlevered may in fact be a competitive advantage not only in obtaining financing but, frankly, almost a necessity in winning the underlying transaction to begin with.”
Senior living vs. multifamily
The active adult sector is being looked at from two sides, Bowyer said. On the one side, you have traditional senior housing lenders or investors seeking to diversify or chase some of the relatively strong performance those communities have seen. On the other side are traditional multifamily players who see the property type as a “middle ground” between multifamily and senior living.
“It’s bringing capital from both sides, and it’s really helping drive that market,” Bowyer said.
When examining an active adult opportunity, Livingston starts by looking at comparable communities both on the multifamily and independent living side. Pricing for active adult communities typically lies about 30% to 40% below typical independent living but about 10% above typical multifamily communities.
One piece of advice that Ryser had for anyone looking for active adult project financing is to address the property type’s “elephant in the room,” aging in place. The concern among some lenders is that active adult communities may start with a low average age and acuity, but that could creep up over time as residents age.
“It’s going to have to be somebody who can talk through that and say, ‘No, this is how we’re going to stay active. This is how we’re going to stay viable in this market.’” Ryser said.
Operators should also be cognizant of the fact that it matters to lenders whether they are managing the product type as a senior living or a multifamily product.
“I can tell within about a few seconds of looking inside of a unit, whether the person came from a multifamily background or came from a senior housing background,” Scola said. “It’s as quick as looking whether or not there’s a bathtub in the bathroom and not a walk-in shower.”
Livingston is taking the philosophy that active adult is a mix of multifamily, senior living and hospitality, and that operators must find a healthy balance.
“The minute you start talking about food and … dieticians, that starts feeling very independent living to me,” Scola said. “We don’t view active adult as a care model, we view it as an independence model, we view it as a lifestyle model.”
Another crucial piece of advice: active adult entrepreneurs should be forthcoming and honest when seeking financing.
“Start early and talk to your lender about your project — and be transparent about the successes and some of the pitfalls,” Ryser said. “If you are transparent about it, I think you’re going to find a lender.”
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