Senior Housing Construction Outlook Clouded By Contractor Expenses, Capital Availability

The construction industry is in the midst of a fragmented recovery from the disruption caused by Covid-19, mirroring the general economy.

Senior housing construction projects with financing in place before the coronavirus swept across the country in the spring are underway, while those announced during the outbreak struggle to secure financing, according to developers who spoke with Senior Housing News.

Construction timetables vary from market to market, perhaps due to lower wage workers opting to stay home and collect enhanced benefits rather than risk catching the virus on site. Municipal inspectors are playing catch-up inspecting construction sites, either due to pulling extra duty from fellow inspectors who contracted the virus, concerns over the cleanliness and population density of a job site, or a reluctance to conduct virtual inspections.

As the pandemic progresses, general contractors and subcontractors that have absorbed unforeseen expense increases will look to protect themselves from all of this when bidding on future projects, and will underwrite the time lost to protracted inspections and manpower shortages to developers, Jay Fritzler, ownership representative for The Ridge Senior Living, told SHN.

The Ridge owns two communities in Utah, and is currently developing The Ridge Pinehurst, a $150 million senior living community in Lakewood, Colorado, offering independent living, assisted living and memory care, with Cappella Living Solutions as the operator.

“[Contractors] are going to factor in a Covid-19 element, and we’re going to see some longer contract times,” he said.

Contractors absorb expenses

Projects that involve large congregate settings such as hotels, movie theaters, restaurants and airports have stalled and will remain that way for some time, as the general population is reluctant to return to these settings without a proven vaccine in place, According to Julian Anderson, president of cost management and quantity surveying, project management and advisory services firm Rider Levett Bucknall.

Conversely, construction of data centers, warehouses and distribution centers, and single family homes are moving along at a brisk pace. And that is where the financing is flowing.

“There’s as much work as you could possibly manage in those sectors,” he told SHN.

That is a far cry from concerns in spring that construction pipelines across the country would be limited to only essential projects such as infrastructure and residential housing.

But general contractors and subcontractors are experiencing expense increases, mainly because the work contracts they negotiated were done before the pandemic. General contractors are screening workers on site for the coronavirus and removing anyone exhibiting symptoms. Workarounds have been implemented to ensure social distancing on job sites.

These added measures are affecting budgets and construction timetables due to reduced productivity. But, in an acknowledgement of the seriousness of the situation, contractors and subcontractors are absorbing those hits and looking at ways to mitigate the rising expenses elsewhere.

If this continues, contractors and subcontractors will look for ways to insulate themselves from delayed timetables and rising expenses as they bid on new contracts. That could result in more expensive development pro formas.

“I don’t think it’s in their best interest to keep it from being passed on to ownership or developers. I think that’s exactly what they’re going to try and do,” Fritzler said. “Contracts are going to start to insulate the contractor and the subcontractor from these types of interruptions or escalation of cost; that’s going to get passed directly on to the developer.”

Tight capital markets

Developers that secured construction financing for their projects prior to March have been able to move forward as the pandemic continues. For more recently announced developments, however, placing capital is a challenge, Ryan Companies Senior Vice President of Senior Living Julie Ferguson told SHN.

The construction industry continues to struggle with an imbalance in the debt and equity markets. Many banks, especially, refuse to review new projects and offer term sheets. This led to delays between 90 and 120 days on some of Ryan’s developments.

“Closings should have happened in August are now happening in October and November. And closings that should have been happening in November are getting pushed to the beginning of 2021,” she said.

But the owner and developer is keeping its pipeline moving forward. It has four developments in the works set to be delivered between November 2020 and August 2021 which are expected to finish on time and on budget. Site selection continues, and Ryan has been able to lock in desirable land for future projects.

“Depending on the market, those [developments] have a long life cycle ahead of them to get entitled, teed up and ready to go,” she said.

Lenders that placed capital prior to the pandemic have taken on a more active role to service their clients, as well, The Ridge Senior Living COO Mandy Hampton told SHN. Some are working with developers and operators to adjust lease pro formas, understanding that the current environment may result in withdrawn deposits or possible concessions to accelerate move-in velocity.

“We’ve seen [lenders] have to re-forecast pro formas, to have a more conservative projection,” she said.

Varying labor, materials availability

The pandemic continues to have varying effects on labor and materials, which are impacting senior living construction costs. For a mid-level assisted living project, cost per gross square foot ran from around $183 on the low end to $234 on the high end in “mid-level” cities, according to the Summer 2020 index from The Weitz Company.

Enhanced federal and state unemployment benefits, along with other relief sources from the CARES Act stimulus package, provided construction workers with the means to stay at home instead of risk contracting Covid-19 on a site, Fritzler said.

“For a lot of our unskilled labor, they’re not taking home more than $15 an hour,” he said “If they’re hired through a labor [agency], the agency may be giving $15, but the employee may be netting only $10 or $11 an hour,” he said.

Ryan, however, has been able to quickly fill openings on job sites in states such as California, where senior housing falls under essential construction because it is considered residential housing.

“We were fortunate that if we had a shutdown at a project, it was short-lived,” she said.

As a contractor, Ryan is also seeing a flattening of overall prices from subcontractors throughout the pandemic in some markets, in part because materials pricing is stabilizing. The company used to project a 2% to 3% quarterly increase in subcontractor pricing.

“We’re not having to bake in construction cost increases,” she said.

But there have been some shortages in finished products, as well as raw materials such as lumber, copper and oil, which is an essential ingredient in PVC piping and asphalt. During the outbreak’s initial disruption, lumber mills and manufacturing plants shut down to mitigate the spread of the virus. As states began phased reopening plans, those plants were able to re-open at varying capacities, depending on the market, Anderson said.

Pricing remains elevated for these materials, but it has been largely negated because building valuations have flattened.

“What that tells me is general contractors and subcontractors who are bidding on projects are starting to keep a lid on construction prices, because they are uncertain about what’s what’s going to be down the road,” he said.

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