Senior Housing Is ‘Losing The War' For Funding As Development Gets Harder

While any property is difficult to finance right now, senior housing is at the nexus of a few factors that make it especially tricky — tight capital, thin margins and relatively little advocacy.

The need for senior housing is only set to balloon in the coming years as the baby boomer population ages. There are over 76.4 million baby boomers living in the United States, and the youngest of the generation are set to turn 60 this year. 

The increased demand is coming at a time when little new product can be built, real estate executives said last week at Bisnow’s Mid-Atlantic Senior Housing event, held at the Renaissance Arlington Capital View.

And it can be especially difficult to solve the sector's challenges, The NHP Foundation Senior Vice President Mansur Abdul-Malik said, because senior housing doesn’t benefit from the same level of public or private advocacy as affordable family housing. 

“From a policy perspective, it's just not enough advocacy in order for there to be a carve-out for the financing to be able to fill the gaps created by increased interest rates and construction costs and higher land costs, in order to be able to build specifically dedicated senior housing,” he said. “It’s just losing the war.” 

Opportunities like the Low Income Housing Tax Credit and voucher programs, he said, are instead geared toward family housing, prioritizing properties with family-sized units, and more LIHTC points given towards those with playgrounds.

Developers are working to find ways to piece together the puzzle of building senior housing. 

“What we're trying to do is understand that we've been given the cards that we were dealt and now is for us to be able to play them in a certain way,” Abdul-Malik said.

One of the problems is simply rising inflation. Developers said increased costs are a huge barrier to getting properties to pencil, and costs have risen so much they can’t hope to make back what they put in as quickly as they used to upon lease-up. 

“A lot of the upfront cost of construction, we used to be able to hopefully break even with a lot of the initial entrance deposits of the residents that would move in,” National Senior Communities Finance Director Daniel Tyler said. “That's not the case anymore.”

The elevated costs also present a problem for the large number of aging assets the company — one of the country's largest owners and operators of senior housing — needs to reposition. Renovation projects that used to cost between $15M and $20M are now likely to range from $30M to $40M, he said. 

Arlington Partnership for Affordable Housing Senior Vice President Mike Chiappa said senior affordable housing developers that use tax credit financing have taken a “double hit” from the macroeconomic challenges because the amount of equity they can raise has gone down.

“One of the things that’s a little more subtle about the tax credit field is that our main investors are banks, which have an internal yield requirement that they have to look at,” they said.

“And as rates have risen, those internal requirements have also risen, which means we’re able to raise relatively less equity for the same amount of tax credits than we were a couple of years ago. So our debt has gone down, our equity has gone down and construction costs have gone up.”

With inflated costs and a bigger strain on funding, developers of senior housing also have to deal with the fact that an outsized portion of their residents are retired and living on fixed incomes, meaning they have to price their units accordingly and get less rent in return. 

Chiappa said that from his experience, even pricing units at 60% of the area median income is a stretch, and APAH is looking at reducing rents to 50% or 30% AMI. 

“But obviously that also further reduces the debt that we're able to raise,” he said. “So it's a pretty challenging environment.”

Abdul-Malik said one way his nonprofit is making deals work is to dig into municipal sources of capital that have specific mission-based objectives.

“So that means making sure that we're building more energy-efficient units,” he said. “It means making sure that we're building what money wants to pay for. There's money out there and it will pay for stuff. The question is, are you building what it wants to pay for?” 

NHP looks for that funding in places like the federal government’s Inflation Reduction Act, state and local RFPs and master-planned communities, as well as environmental incentives, Abdul-Malik said. 

The organization is in the process of building a 100-unit senior affordable property in Baltimore. The $52M project received $13.3M from the city, $8.7M from the U.S. Department of Housing and Urban Development and $5.4M from Maryland’s Community Development Administration.

The senior housing sector sees potential in private sources as well. Gragg Cardona Souadi Partner Oussama Souadi pointed to the impact Amazon’s Housing Equity Fund has had in getting projects to pencil. The fund launched with $2B in January 2021 and this summer added another $1.4B to the pot. And he called on other corporate ESGs to get in the game. The investment won’t yield hockey stick gains, he said, but it is reliable. 

“This is not opportunistic level of returns,” Souadi said. “This is a place where you're going to get predictable long term returns, lower single digit, high, you know, maybe higher single digits, low double digit returns. But you can get that predictability.” 

Chiappa said that a way to create the more desperately needed senior housing is to pair it with other types of housing. 

“My theory going forward is intergenerational, mixed-income communities is one way to start to create that cross-subsidy,” Chiappa said. 

George Mason University is undertaking such a project with its One University development, set to deliver this year. The property will consist of 120 affordable senior units, 333 student housing units and 120 affordable multifamily units across a 10.8-acre site next to the Fairfax County campus.

Abdul-Malik, for his part, said he’s optimistic about the innovation taking place within the senior housing space.

At one of NHP’s affordable housing symposiums, he was especially taken with the idea of insurance companies providing housing vouchers — with the justification being that stable housing translates to healthier individuals, studies show. 

“When everything is broken, that's when we typically come up with our best ideas,” he said.