The commercial real estate industry is in a virtual free-fall. Vacancy rates are soaring in many projects even as rental rates drop. When the market hits bottom, which is widely expected to happen in 2010 or early 2011, the value of commercial real estate may settle at depression levels—40 to 50 percent below 2007 peaks, according to the "2010 Emerging Trends in Real Estate" report from PriceWaterhouseCoopers and the Urban Land Institute.
Against this backdrop, the news for senior housing complexes is not that so many have failed but that so few have followed in the path of Erickson Communities. A leader in continuing-care retirement communities (CCRCs), Erickson filed for bankruptcy in the fall. Still, the company's housing complexes, most of which are stable and viable, are not part of the bankruptcy, and Erickson has continued to honor its policy of refunding entrance deposits when residents die or leave a community.
Erickson was exposed to growing problems in debt costs, incurred for community expansions begun well before housing markets tanked. Erickson's business model—involving hefty entrance deposits and monthly maintenance payments—was particularly affected by the collapse of residential home values and sales. Prospective new community members were not able to sell their homes and thus couldn't raise the money needed for Erickson's entrance deposits.
Other CCRCs with entrance fees face similar challenges. But many have different business models, and CCRCs are only one of several types of senior housing. There are assisted living complexes, special facilities for people with Alzheimer's disease, places for younger seniors with minimal health needs, and traditional nursing homes. Many places don't charge entrance fees and instead provide rental arrangements and pay-as-you-go plans for living and healthcare needs. "I think the rental senior housing market is not facing too much difficulty," says David Schless, president of the nonprofit American Seniors Housing Association (ASHA) in Washington. Still, many communities are scrambling to attract and retain residents and have been forced to lower prices to maintain viable occupancy rates.
One major reason senior housing may be faring better than commercial real estate in general is that many housing projects are owned by nonprofits—affiliates of hospitals, churches, and community organizations. With a social-service culture and, often, a charitable foundation to fall back on, they have been better able to weather the downturn than some purely private real estate ventures.
Still, there's no question that the movement of people into senior housing communities has sharply slowed during the recession and that the long-term growth of the industry has been stopped cold. Construction of new senior housing units has been off 40 to 45 percent from an already slowed pace of development in recent years, according to industry reports. And many communities face funding challenges in the next year or two as earlier debts come due.
As the economy slowly recovers, however, the underlying demand for senior housing is expected to return. Fueled by pent-up demand and the growth of aging populations, a new wave of seniors and their families will be considering senior housing. The financial soundness of a community should be at the top of the list of questions that need to be addressed.
Susanne Matthiesen is managing director of the Commission on Accreditation of Rehabilitation Services (CARF), a private company that reviews and accredits various institutions, including about 300 CCRCs around the country. CARF includes extensive financial assessments in its review of a community, and Matthiesen advises consumers to retain an accountant or financial adviser. "It may be unrealistic to expect even the most savvy consumer to understand all the financial ratios," she says.
Matthiesen reels off a list of questions and concerns forseniors and their families: Read the facility's residence agreement carefully, along with any related medical-care agreements. Is the company reputable? How long has it been in business? What do other people say about it?
"In many states," Matthiesen explains, "CCRCs are required to release audited financial statements. What we say is that the information should be shared [by communities] in a way that is understandable. Consumers should feel like they have access to most financial statements if they want to look at them." Also, she advises, look at changes in monthly fees. And if you want to speak with a senior executive at the community, you should be allowed to.
Beyond finances, Matthiesen says, people should look for signs that a community has adapted to shifting economic and housing conditions. Communities have had to develop new business opportunities, and many are reaching out to their local markets to provide home-based services. Communities with more flexible and responsive business models will emerge stronger in the long run, she says.
There are extensive services to help locate and evaluate senior housing opportunities. The National Association of Area Agencies on Aging is composed of hundreds of government-supported programs that help consumers in their communities. It offers a locator tool to find local offices and also supports a senior-housing locator. The U.S. government has an online elder-care locator to find nearby experts. There also is a national association of private elder-law attorneys with a tool that allows users to search for members by location.
Operating rules for senior housing communities, including consumer disclosure requirements, are largely set at the state level. The ASHA and the American Association of Homes and Services for the Aging jointly publish an annual state regulatory guide to assisted living and CCRCs. At $75, it's expensive, but it's widely used by agencies and might be found in local libraries as well.