It is clear there is lots of capital available for senior living, perhaps more than at any other time at in recent history and yet . . .
This article is part of a series on innovation (and the lack of innovation) in senior housing that I started in October. You can see the list of what has been published and what is coming at the end of this article.
Lots of Capital
It is clear there is lots of capital available for senior living, perhaps more than at any other time at in recent history . . . at least that is the perception of the capital providers and well established developer/operators. There are some caveats though. Capital is particularly easy for high occupancy stabilized communities. There is a lot of capital available for large national and regional chains.
The problem is that for smaller or newer developers the availability of capital is still very uneven. Wearing my two hats of representing Vigil Health Solutions and as publisher of Senior Housing Forum I spend quite a bit of time talking to developers who are small regional players or relatively new to the industry and for many of them, maybe even most of them, capital availability is still a big problem. In many/most cases, I don’t know enough about the developers, managers or marketplaces to have any kind of opinion about the viability of a given project.
However for a small percentage, I know enough about the developers, operators and markets to have a pretty good understanding of the viability of the project. What baffles me is that not infrequently, I see average projects obtain financing easily and some exceptional projects really struggle to find capital. It is clear that even with fancy formulas and processes, much of the funding process continues to be about the relationships and the pitch skills of the developer.
The Innovation Stifling Confusion
When I was at NIC a few months ago I spent time talking to three different developer/operators that were really struggling to find capital for their projects. In two cases the projects did not fit the mold of a typical senior living project but were being developed by seasoned teams, and the other was in a high barrier to entry marketplace with corresponding high develop costs (this project was finally funded and is under construction).
Mitigation of Risk
Providing capital is a mix of risk mitigation and yield, with risk mitigation having a higher value than yield. A big part of that risk mitigation equation means funding projects that are similar to other projects that have been successful. This is likely a reasonable short-term goal, but may also be very short-sighted. Here is why:
- There are only so many good markets with enough seniors who have both financial capacity and desire to move into a single homogeneous product type (or maybe more accurately a narrow range of product types).
- While we have a growing senior population, the vast majority of Boomers are 15-20 years away from needing/wanting senior living which means the boom is still a long way off.
- The same old, same old approach means the industry in unlikely to expand the total percentage of the senior population that will choose to move into an institutional setting.
- Partly because of costs and partly because of the nature of the emerging Boomer age group we will see more creative solutions geared toward keeping people in their own homes and out of senior living communities.
- There is significant movement toward small home styles of senior living. This is not so attractive for capital providers because it increases the cost of due diligence and servicing.
Don’t get me wrong, I believe the development landscape for traditional senior living communities will continue to be decent, but I think it could be hugely better. In the next few days I will offer my dream. The Rest of the Series:
- NIC is just like high school
- What if you had a big pot of money
- Why we are so slow to innovate – It is largely the fault of capital providers (Two parts this article and part two in the next few days)
- Why we are so slow to innovate – It is the fault of developers and operators . . . but even more the fault of capital providers
- Are there still great market opportunities across the country or are we heading into an era where there is danger of over saturation? – Yes – No – Maybe – Are there really any experts?
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