The near collapse of the real estate market has stymied many developers, but it hasn’t discouraged California P.E.O. Home.
The Alhambra-based company is forging ahead with an ambitious plan to build a luxurious $126 million housing complex – replete with a spa, fitness center, fine-dining restaurant and other amenities.
Thought that kind of project had gone out of style during the new austerity? Not when the residents are retirees.
The non-profit builds senior communities, one of the few corners of the local and national housing market not moribund. In fact, as the first wave of baby boomers hits retirement age amid an insufficient supply of elderly housing, the market is on the cusp of what many believe will be a rapid expansion.
“The senior population is absolutely increasing,” said Kristis Ferris, senior executive of business development for California P.E.O. Home. “Just in Alhambra, there’s over 5,000 seniors who meet our qualifications and there’s not enough housing to support the boom coming up, nor to support what’s there now.”
Indeed, the company’s project, called Redstone, will involve tearing down 113 existing units and replacing them with 183.
But it’s not just non-profits that are responding to the rising demand for senior housing. For-profit developers such as Silverado Senior Living Inc., Senior Resource Group and Belmont Village LP have each recently opened assisted-living facilities in Los Angeles County.
According to the U.S. Census Bureau, the number of people at least 65 years old in the United States is expected to rise by one-third over the next decade to more than 54 million. Los Angeles, in particular, is considered a promising market because of its warm climate, large population and abundance of wealth. That all translates into a significant number of seniors looking for housing – some of whom are willing to shell out for pricey accommodations.
Exact figures are hard to come by, but there are easily more than a dozen senior housing projects that have recently opened, are under construction or are in the final stages of planning in the county. In addition, the nation’s largest real estate investment trust, HCP Inc., is headquartered in Long Beach and has made big bets on assisted-living, nursing homes and other facilities for the elderly.
It’s a developer’s dream with one exception: financing – a problem that cuts both ways.
The lingering effects of the financial crisis means developers have struggled to obtain capital, while the soft housing market has made it harder for the elderly to sell their homes. That’s key to scraping together money for one-time entrance fees that can exceed $200,000 for the fanciest assisted-living facilities.
“Is there going to be a great demand from the baby boomers? Sure,” said Thomas Safran, founder of Brentwood’s Thomas Safran & Associates, which has five projects under way. “I don’t think there’s a question that senior housing is going to be growing in demand. The difficulty there is getting financing for those projects.”
Building boom
Senior housing can refer to a variety of dwellings, including age-restricted apartments – both market rate and affordable – and assisted-living residences, which offer personal assistance from trained staff. Continuing care retirement communities, such as Redstone, typically feature independent living, assisted-living and nursing home services in one complex.
Some projects are aimed at seniors with specific tastes or lifestyles. For example, there’s a project in Laguna Beach that caters to gay and lesbian seniors, while Los Angeles Community Redevelopment Agency last week announced groundbreaking on the NoHo Senior Artists Colony, a 126-unit, mixed-use project in North Hollywood that will include a 76-seat theater operated by a professional theater company.
“It’s really about affiliation. It’s about people wanting to be with other people who share the same kind of values,” said Victor Regnier, an architecture professor at USC and expert in senior housing development.
One of the biggest senior housing developers in the county is Belmont Village. The Houston-based developer recently unveiled its newest community, a high-end assisted-living facility overlooking Wilshire Boulevard in Westwood. The company is building another complex in Thousand Oaks that is expected to open later this year. (See article page 27.)
The Westwood project – the company’s largest to date with 176 units, a pool, beauty salon and more – has seen overwhelming interest from potential residents, said Chief Executive Patricia Will.
“It’s been a very fast lease-up,” Will said.
Belmont Village has been able to move aggressively on its projects because it has long-standing relationships with large equity investors such as General Electric Co. It has been something else for smaller developers.
Consider Pilgrim Place. The Claremont company in October opened the first phase of a $26.5 million mixed-used project in the eastern San Gabriel Valley city that includes new offices and more than two dozen independent-living units.
The company had expected to finance the project through bonds, but when planning started in 2008, the financial crisis had dried up the bond market. So the organization looked for bank loans – only to be turned down by 21 different lenders over an eight-month period, according to Chief Executive Bill Cunitz, who wrote about the experience in the organization’s 2009 annual report.
Finally, with stability returning to the fixed-income sector, Pilgrim Place, with the help of New York’s health care-focused investment banking firm Cain Brothers, sold $26.5 million in bonds in August 2009.
Senior Resource Group, a Solana Beach developer, lucked out with its Village at Northridge, a $90 million complex featuring a 62-seat movie theater and full bar, among other amenities.
President Michael Grust said the developer was able to pay for the project through debt and equity financing – raised in 2007 prior to the financial crisis. But Grust is optimistic. Senior Resource owns three adjacent acres and may expand the facility when the economy recovers.
“We’ll see where the market takes us,” he said.
However, a lack of financing has completely stymied some developments.
In November, Stonebridge Holdings Inc. placed the Bundy Village & Medical Park project in bankruptcy in part because the firm could not secure necessary financing.
The West L.A. project – a $500 million, 1.3 million-square-foot complex of medical space and senior housing – may yet move forward, but the Century City developer is facing opposition from the community over the increase in traffic it could generate.
Michael Lombardi, who is heading up the project, declined to comment. But in the past he told another news outlet that he would like to bring back a scaled-down version.
Loren Shook, chief executive of Irvine-based senior housing developer Silverado Senior Living, said he has seen a number of his competitors in Southern California put their expansion plans on hold due to the difficult financing markets.
“A lot of groups are having trouble finding money,” he said. “New construction starts really dropped off precipitously as a result of the economic downturn.”
Indeed, senior housing construction starts nationwide fell 64 percent between 2007 and 2009 – from 12,700 units to just 4,600 – according to NIC MAP, a senior housing industry research service run by the National Investment Center. Through the first three quarters of last year, senior housing construction was up 57 percent from 2009, but there is a long way to go.
Alternative means
Despite a lack of equity and debt capital, there have been some deep pockets available for developers.
Shook recently opened the doors to a completely renovated dementia care assisted-living facility in West Hollywood, one of Silverado’s five in the county. The bulk of the financing for the project came from longtime partner Health Care REIT Inc. of Toledo, Ohio.
REITs have proved to be among the more reliable investors in senior housing during the downturn.
Last month, HCP announced the blockbuster $6.1 billion acquisition of 300 facilities from HCR ManorCare, a Toledo-based operator of skilled nursing and assisted-living facilities. The deal turned HCP into the nation’s largest health care REIT (See article page 28).
The deal came not long after Ventas Inc., a Chicago REIT, paid $1.5 billion for the real estate assets of Altria Senior Living Group. In a conference call after the transaction, Ventas Chief Executive Debra Cafaro said the company expected to benefit from “redevelopment opportunities in certain assets located in affluent infill locations primarily in Los Angeles.”
The other traditional source of financing has been a variety of local, state and federal funding aimed at boosting the supply of affordable housing for the elderly, including federal tax credits for developers.
However, Brentwood developer Safran said that while a straight-up affordable complex is able to secure financing, once a project has a mix of units, it’s a different story.
“We did a mixed-use project in the city of Carson and we got all these lenders wanting to do affordable elderly housing but we couldn’t find anybody willing to do the market-rate portion of the project,” said Safran, who has a 75-unit affordable project in Calabasas slated to open later this year.
Another issue: The overwhelming demand for affordable housing has prompted many developers to get in the game.
“I’m competing for the limited local funds and limited federal tax credits that exist to put projects together,” he said. “I have a lot more competitors than I’ve ever had to do what I’m doing.”
At the same time, public funding is facing drastic cuts. To save California some $1.7 billion, Gov. Jerry Brown has proposed eliminating the state’s 425 local redevelopment agencies. Currently, at least 20 percent of redevelopment funds go toward affordable housing.
Challenges, opportunities
Indeed, the cuts in public funding are worrying advocates for affordable senior housing, who believe it could lead to a surge in homelessness among the elderly.
“At the time that this huge wave of people are coming, funds are being cut left and right,” said Lois Starr, director of the housing development and preservation division for the Community Development Commission of the County of Los Angeles. “We’re talking about a huge number of boomers coming into their 60s.”
There are currently 33,960 units of senior housing in Los Angeles, according to data from NIC MAP, a senior housing industry research service run by the National Investment Center. Yet census data show that there are more than 1 million local residents older than 65.
Given the significant demand, experts believe that senior housing will be one of the most promising real estate markets for the coming decades.
Only about 3 percent of seniors live in high-end facilities, but Regnier, the USC professor, believes that once the housing market recovers and seniors are able to sell their homes for a fair price – typically the primary source of equity for elderly individuals – the market will improve substantially.
Eric Dowdy, associate director of public policy for Aging Services of California, a Sacramento-based advocacy group for senior care providers, puts it another way.
“We’re kind of in a weird spot,” he said. “I think absent the recession we would see a huge boom right now. It’s just a matter of when the economy matches up with the demographics.”
