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Local senior housing projects cope with high vacancy rate

October 31, 2009 3:56 PM WAYNE HEILMAN THE GAZETTE Construction of three senior housing complexes in the past 1½ years combined with a struggling local housing market has left Colorado Springs with one of the highest vacancy rates in the nation for such complexes, according to a new report. The vacancy rate in such complexes — which are like apartment buildings but also offer meal services, housekeeping and activities for residents — was 17.5 percent as of June 30, according to the National Investment Center for the Seniors Housing & Care Industry in Annapolis, Md. The vacancy rate in local complexes has jumped from about 10 percent before two of the three complexes opened and ranks as the 11th highest among the top 100 largest metropolitan areas. The openings of MacKenzie Place in central Colorado Springs and the Palisades at Broadmoor Park in southwest Colorado Springs added nearly 300 apartments and cottages since the beginning of 2008, increasing the supply of such units in the Springs by more than 14 percent. The opening of Summit Glen in northeast Colorado Springs, now scheduled for mid-December, will put another 118 units on the market and boost the supply by another 7 percent. The units under construction at Summit Glen rank Colorado Springs ninth among the top 100 metropolitan areas for the highest percentage of senior housing units under way compared with the number of units on the market, according to the center’s data. That percentage is more than triple the national average of 2.3 percent, but still less than the 25 percent level the Denver area reached two years ago as part of a construction boom of such units along the Front Range. The additional units have pushed vacancies higher in the rest of the Springs area’s senior housing complexes — 12.5 percent of the units in complexes 2 years or older were vacant as of June 30 and only four of 18 complexes reported vacancy rates of 10 percent or less, considered by the industry to be a healthy rate, said Michael Hargrave, vice president for the center and director of its quarterly survey of 12,500 units in the nation’s 100 largest metropolitan areas. “You’ve had a number of properties open at one of the worst times to open. It is tough to get people to move into properties now because the demand for retirement housing is tied to the rest of the housing market. If residents can’t sell their houses, they can’t afford to move,” Hargrave said. “About 10 percent of the properties in the (Colorado Springs) market are offering significant discounts and a lot more than that are offering a discount of some sort.” Nationwide, vacancies in retirement complexes are up “a bit, but not substantially,” said Dave Schless, president of the American Seniors Housing Association, a Washington, D.C.-based trade group for developers of such housing. “Most of the potential residents have owned their homes for 30 or 35 years and have no mortgages, so in most U.S. housing markets the value of the home is what is was two or three years ago but it is still worth as much as it was five or six years ago,” Schless said. “What would have been an easy decision for potential residents has become more difficult and may be put off for a least a while.” At least one other project planned for Colorado Springs has been delayed. Bonaventure Senior Living bought 12.3-acres last year near Memorial Hospital North in the Cordera subdivision of Briargate and sought a building permit before withdrawing its plans late last year. The company put the $50 million project on hold until at least 2011 or 2012 because of delays in getting development approval, said Ron Murphy, a site selection consultant to the project. The senior housing industry is prone to boom-and-bust cycles because during good years such facilities can produce returns of 30 percent or 40 percent on the owner’s investment, said Toby Gannett, executive director at Palisades. Both MacKenzie Place, which has been open since April 2008, and Palisades at Broadmoor, which has been open about a year, have filled half of their units. Summit Glen has taken deposits from 17 potential residents who want to move in once the complex is completed next month, in part by guaranteeing no rent increases for two years to help seniors who are having trouble selling their homes, said Sherry Giambalvo, Summit Glen’s marketing director. “Most properties are finding it more difficult than they thought to fill and are behind forecasted occupancy levels,” said Elisabeth Borden, owner of The Highland Group, a Boulder-based consulting firm for the senior housing industry. Occupancy levels in the Springs have been dropping for about two years as new projects hit the market, although vacancy numbers in most older projects remain fairly stable, she said. “A lot of properties expect to take two years to fill up and those with more than 100 units can take up to three years,” Borden said. “The new projects are behind in their lease-up, but they are doing well in light of the economy and are doing better than most other types of commercial real estate.” Many potential residents are delaying moving from their longtime homes to retirement complex in hopes the local and national housing markets will improve so they can get a higher price for their homes, Borden said. Many senior housing developers are offering bridge loans and home sales assistance, including one program offered through ERA Shields Real Estate that guarantees a senior’s home will be sold within six months. The program, offered through Palisades, allows Palisades residents to defer rent until their home is sold, or bought by ERA Shields, said Erica Gioga, Palisades marketing director. The seller pays for an appraisal and must complete recommended repairs and other remodeling to prepare the home for sale. If the home doesn’t sell within six months, ERA Shields will buy the home for 90 percent of the appraised value. Borden said many properties, especially newer complexes, are offering some incentives to new residents, such as adding extra meals to resident dining plans, interest payments on bridge loans or rent concessions. That’s because the decision to move into a retirement complex isn’t driven by an immediate need, so potential residents can wait out a bad housing market until conditions at least start to improve. Those deals won’t last forever. “Over the long haul — the next 20 years — the senior housing business will double in size because of demographics alone as baby boomers age. That bodes well for the senior housing industry,” Schless said. New retirement complexes must reach occupancy rates of 65 percent to 70 percent to be able to make payments on loans that finance their construction, said Murphy, the site selection consultant. That likely means none of the three newest retirement projects have yet reached a point where they are generating cash — instead of using it — for their owners. Two of the three projects — MacKenzie Place and Palisades — must repay the loans used to finance construction in less than two years, according to loan documents filed with the El Paso County Clerk and Recorder’s office. Palisades at Broadmoor Park LLC, a Colorado Springs partnership that developed Palisades, borrowed $15.5 million a year ago from First Community Bank that must be repaid by April 2011 and another $600,000 from the same bank that must be repaid is less than a year. MacKenzie Place Union LLC, an Englewood-based partnership that developed MacKenzie Place, borrowed $41.6 million in 2006 from Sovereign Bank in Boston that must be repaid in August 2011. Colorado Springs Retirement Residence LLC, a Vancouver, Wash.-based partnership that is developing Summit Glen, borrowed $16.2 million a year ago from Pittsburgh-based PNC Bank, but the maturity date of the loan wasn’t listed. Jeff Dunn, managing partner of Palisades, said the complex is counting on its unique partnership with the University of Colorado at Colorado Springs, to set it apart from its competitors. As part of the partnership, Sara Qualls, director of the UCCS Gerontology Center, and several other faculty members are actively involved in the mental health and wellness program for residents at the complex. Under the partnership, Palisades developer Dunn & Associates will pay UCCS 1 percent of its annual income, which could amount to $50,000-$60,000, that would be available for grants for age-related research. Dunn said he expects occupancy at Palisades to reach 90 percent by next spring and the area’s overall occupancy rate should reach that level within a year. Cheryl Davis, general manager of MacKenzie Place, said occupancy levels at the complex are “on track” with expectations and that the project became profitable earlier this year. MacKenzie Place was designed to have meal service equal to “restaurant quality and offer concierge and other services found at full-service hotels. “We are very hospitality based. We want to try to make the experience here more like a luxury hotel. For example, we have a full liquor license so our residents can order a bottle of wine or beer with their meal,” Davis said. “For us, the most important thing is not to be like everyone else in this industry. We are not for everybody; we are for those who want this level of service and can afford it. Residents can have steak and lobster every night if they want.” The housing industry slump prompted MacKenzie Place to stop developing individual cottages, which are more like single-family homes than apartments but give residents access to all services in the complex, Davis said. Summit Glen was originally developed to be acquired by Salem, Ore.-based Holiday Retirement Corp., but the company declined to purchase the project and will remain with Vancouver, Wash.-based developer Hawthorn Retirement Group, said Carol Baier, who handles marketing for the company. Holiday, the nation’s largest senior housing complex owner, also owns Sunridge Independent Retirement Residence in northeast Colorado Springs. Hawthorn, which is owned by members of the same family that started Holiday, markets its properties as offering “the highest quality at the lowest price” and offering potential residents a better value than competing complexes, Baier said. NEW LOCAL RETIREMENT COMPLEXES MacKenzie Place Address: 1605 Elm Creek View (southwest of Union Boulevard and Fillmore Street) Opened: April 2008 Number of units: 193 Occupancy rate: 50 percent Owner: MacKenzie Place Union LLC, Englewood Operator: Leisure Care LLC, Seattle, Wash. Palisades at Broadmoor Park Address: 4547 Palisades Park View (northwest of Academy Boulevard and Broadmoor Bluffs Drive) Opened: September 2008 (assisted living and memory care unit opened later) Number of units: 116 Occupancy rate: 60 percent Owner: Palisades at Broadmoor Park LLC, Colorado Springs Operator: Dunn & Associates Inc., Colorado Springs Summit Glen Address: 4825 W. Old Farm Drive Opened: Mid-December Number of units: 118 Occupancy: 17 units are under deposits Owner: Colorado Springs Retirement Residence LLC, Vancouver, Wash. Operator: Hawthorn Retirement Group, Vancouver, Wash.