The aging of the U.S. population is transforming all aspects of the American healthcare system, including senior housing. The continued growth in demand in the senior housing market is attracting both equity and debt capital from all over the world, as senior housing real estate is viewed as a stable and generally recession-proof asset that offers better returns than many other types of real estate.

And the options are expanding. Healthcare organizations looking to meet the growing need for high-quality resident care facilities and services have moved beyond traditional assisted living and nursing home facilities.

Dedicated memory care properties, a specialized housing option for individuals with Alzheimer’s and dementia, have seen a particular surge in popularity in recent years.

Despite the rising demand, success in operating memory care facilities is not guaranteed. Healthcare organizations building and/or operating memory care properties — whether as stand-alone facilities or dedicated wings located in assisted living or skilled nursing facilities — face a number of unique business challenges that must be taken into consideration.


Specialized Structures and Systems

Memory care facilities are generally purposefully built and highly regulated, with unique construction needs and different life safety codes than other types of senior housing. For example, there is a greater emphasis on security, as individuals with dementia often tend to wander.

Potential sources of stress and confusion need to be minimized, so certain structural elements such as dead-end hallways should be avoided. Information technology must be accommodated as well, of course, with secure networks and systems for managing electronic health records and tracking patient outcomes and referrals to higher levels of care.


Staffing Costs

Because residents often need to be supervised around the clock, the staff-to-patient ratio is higher in memory care units than in assisted living facilities, and caregivers must receive special training on how to deal effectively and compassionately with patients with Alzheimer’s and dementia.

These skilled caregivers perform difficult work; this reality, combined with a tight job market, promotes increased labor-cost pressure. Attracting and retaining qualified employees can be a significant challenge in some markets.


Financing Considerations

A variety of financing options are available to healthcare organizations exploring the development or acquisition of memory care properties.

Bank construction financing is one possibility for new development. Bank balance sheet financing is another for organizations that seek to acquire existing properties that have not stabilized or do not seek permanent financing. Fixed- and floating-rate non-recourse permanent financing solutions exist for organizations that seek to be long-term owners of their real estate. Permanent loan sources include Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development. For owners that seek liquidity for their real estate, a sale to a real estate investment trust or private equity firm may be an option. Under this scenario, the owner/operator can continue to operate the property.

Generally, financing terms for memory care properties are more conservative than for assisted living or independent living properties. For example, they usually require lower leverage (a 65%-70% loan-to-value ratio) and higher debt service coverage (1.45x).

Although memory care property rent tends to be higher than in other senior housing unit types, there are risks to revenue, in particular higher resident turnover. Some individuals, especially those with early-onset Alzheimer’s or traumatic brain injuries, may be in a facility for many years, but this resident population will typically have higher turnover.

Generally, residents using memory care services pay privately rather than relying on Medicare or Medicaid payer sources. Few Americans have long-term care insurance, so most residents pay for their care with Social Security, pensions, and personal savings and investments. Oftentimes, residents’ assets include funds acquired through the sale of their home.


Supply and Demand Trends

The demographic trend in this space is undeniable. In preparation for the looming increase in demand, new developments have grown nationally — and dramatically — over the past five to seven years. As a result, certain markets or submarkets have experienced delays in absorbing the current supply, and in many markets memory care has been overbuilt.

The result has been a multi-quarter drop in average memory care occupancy nationally compared to the average growth in average occupancy in assisted living and independent living properties. Lenders continue to take a conservative approach to memory care property financing.

There are a variety of sources of occupancy and supply dynamics for this property type. Because competition continues to be strong nationally, marketing has become critical to operational success. This means marketing to age- and income-qualified seniors, but also marketing to decision-makers 45 to 65 years old, as children will generally research housing for their parents and seek out options that are nearby.

The Census Bureau projects that by 2035, people over 65 will outnumber those under 18 for the first time in U.S. history.

Barring miraculous advances in treatment, this growing population of seniors will create a steadily increasing demand for memory care facilities. For healthcare organizations considering establishing memory care units, keys to success include ensuring that the local market is not oversaturated, structuring the appropriate financing, recruiting and training qualified personnel, and understanding the specific needs of this unique patient population and delivering a high level of service.

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About the Author:

Christopher Honn is Managing Director for Senior Housing with the Healthcare Real Estate Group at Regions Securities out of the company’s Chicago office. Honn has more than 30 years of experience in the financial services industry, with an extensive background providing debt solutions to clients in the senior housing and healthcare industries.


This article was originally published in Modern Healthcare.