Small markets, big opportunities

Legend Senior Living has two projects under development in Jacksonville, Fla., including Windsor Assisted Living & Memory Care. The project is expected to open in July with an average rent of $4,300 per month. Legend Senior Living has two projects under development in Jacksonville, Fla., including Windsor Assisted Living & Memory Care. The project is expected to open in July with an average rent of $4,300 per month.

Despite the myriad challenges small towns present for developers, 'put the right facility in a town of 1,500 and you can make money.'

By Jane Adler

While big markets with robust populations of income-qualified seniors grab the attention of most investors and developers, some contrarians are thinking small instead. 

Mike Mursten developed an assisted living project in Johnson City, a town of about 65,000 people in northeast Tennessee, approximately 60 miles north of Asheville, N.C. He also has two projects in the secondary market of Knoxville, and another in Oak Ridge, a town with 30,000 residents about 25 miles west of Knoxville. 

“People look at my (business) model and think I’m crazy,” says Mursten, president of The Courtyards Senior Living, which is based in Knoxville. “I feel like I’m swimming upstream.”

The Courtyards projects include two or three 10,000-square-foot buildings on a site. Each building contains 18 to 20 units.

The self-contained buildings are operated based on the principles of the Eden Alternative, a philosophy of elder care developed by Dr. William Thomas that emphasizes a small setting and personalized care, especially suited for those with memory loss. “We don’t do big hotel-style properties,” says Mursten.

When location shopping, Mursten doesn’t use a strict formula. He looks at the obvious demographic information, and, of course, considers the competition. Residents typically come from a tight geographic circle near the project, not from 20 miles away. 

A town can’t be too small for a project, according to Mursten, but it has to have enough people with the money to pay his building rents that average about $4,000 a month — an obstacle for new development in many smaller places. 

Last year, Mursten added new buildings to existing communities in Knoxville and Johnson City. He also plans to expand his company and is considering both small and large markets inside and outside of Tennessee. “The easy markets have been picked over,” he says.

The fight for the best locations is seeping into tertiary and even rural markets. As developers hunt for prime spots, some are taking a closer look at smaller places. 

Nonprofit, mission-driven housing providers tend to operate in rural and the least populated areas. But for-profit developers are also carefully analyzing the opportunities in small and mid-size towns. The areas can support the right kind of development, experts say, though thinly populated places have their own drawbacks.

Financing new projects in very small towns can be a challenge. Regional and national lenders usually feel more comfortable funding projects in bigger markets. Small local lenders may not understand the seniors housing industry, or may consider a $2 million deal too risky. 

“Put the right facility in a town of 1,500 and you can make money,” says Bob Christiansen, principal of the Christiansen Senior Living Group based in Fayetteville, Ark. 

Christiansen consults with senior living operators and was previously CFO at Autumn Home Care Facilities, a chain of facilities, many located in small towns.

According to the National Investment Center for the Seniors Housing & Care Industry (NIC), the top 31 or primary markets include big cities such as Los Angeles, Houston and Tampa. 

The 68 secondary markets are metropolitan areas with populations ranging from about 500,000 to about 1 million. Secondary markets include such places as Syracuse, N.Y; Boise, Idaho; and Little Rock. NIC does not track tertiary markets.

Data-driven decisions

Smaller markets, just like big ones, require thorough analysis, say industry experts. Lincoln, Neb.-
based Resort Lifestyle Communities employs a full-time market researcher. The company owns and operates nine independent living buildings with five more underway, and another five in the zoning process. 

The company’s projects are primarily located in secondary markets, though a few are in smaller places, such as the company’s project in its hometown of Lincoln. 

“Sometimes smaller markets are off the radar screen,” says Breck Collingsworth, CEO of Resort Lifestyle Communities. Collingsworth also heads up Cameron General Contractors, which builds the projects. 

“Developers tend to pile into big markets because the perception is that they’re better, but that’s not necessarily the case.”

To find the best markets, Collingsworth combines NIC data with a geographical information system, overlaid with demographics and competitive properties. Twenty-three variables are loaded into a formula to gauge market viability. 

Key variables include the number of income-qualified seniors age 75 or older, and adult children ages 45 to 64. Rents and occupancies are also included.

The country is divided into 2x2 mile grids and each is scored based on the variables. The best possible markets appear on a map in red with a number “1”.

“We’re looking for markets with low competition, high occupancy, high rents and the right demographic mix,” says Collingsworth. “We want the right piece of dirt that’s good today and will be good 15 years from now.”

Resort Lifestyle has a new project, Marshall Square, under development in Evans, Ga., a town of 30,000 located about 10 miles from downtown Augusta. The independent living project will feature 132 units and is slated to open in October 2015. 

Marshall Square will offer meals and weekly housekeeping. Health care providers can rent space in the building to offer services to residents. 

“We only have one competitor there,” says Collingsworth. He contrasts the Evans market with the company’s hometown of Lincoln, which has a population of 250,000 and 1,100 independent living units. The best location for another independent living building in Lincoln is only a mile from his existing property. 

“We would not build there,” says Collingsworth, whose father was a subcontractor for projects built by Holiday Retirement, which has projects in smaller markets. “We would just cannibalize our current building. There are better opportunities elsewhere.”

The town of Evans conducted a study showing a need for more seniors housing. People are also migrating to the area because of the local medical center, notes Collingsworth.

“It’s purely supply and demand,” he says, adding cautiously, “You have to be careful with your analysis because you can’t move the project once it’s built. You’re stuck with the location.”

Average market rents are an important factor to consider, owners and operators say. For example, a secondary or tertiary market may look promising, but if the average rents for assisted living are about $2,500 a month, the market probably isn’t going to support a new development. Average market rents for assisted living and memory care of about $4,000 are more likely to succeed. 

Small buildings have the best chance for success, developers say. Tim Buchanan co-founded Sterling House, a seniors housing chain, now owned by Brookdale Senior Living, which focused on small towns. Sterling House built its first project, with 26 units, in August, Kan., a town of 7,000 people. 

Currently, Buchanan is CEO of Legend Senior Living, an assisted living facility owner and operator based in Wichita, Kan., with 26 buildings in three states. “Small markets are vulnerable to competition,” he notes. “The barriers to entry are low.”

Land is usually inexpensive in small markets and the municipal approval process is often quick. That means a competitor can easily follow a new development. 

Legend has two projects with about 90 units underway in Jacksonville, Fla. The projects are slated to open in July with an average rent of $4,300 per month for assisted living. Memory care will cost about $5,800 a month. 

The company also has a project underway in Tulsa, its second in the market. Another building is under construction in Fort Worth and plans are being made to build projects in Broomfield, Colo., and Carrollton, Texas. 

Buchanan’s buildings have an average occupancy of 97 percent. A high occupancy rate indicates that demand could support a bigger building. But he figures big projects that capture most of the demand would only hurt his own company in the long run.

“We like to leave some supply on the table,” he says. “There’s some modesty in our strategy that has helped us avoid catastrophe,” says Buchanan.

How small is too small?

Towns with a population of 10,000 or less present their own challenges. Many small towns are shrinking. But towns that serve as the county seat and have a hospital are often strong candidates for new seniors housing. Growing exurbs within an hour of big cities are often viable locations too.

Platinum Health Care owns and operates 40 seniors housing and nursing home properties. The company recently bought a struggling nursing home in Harrisonville, Mo., a town of 10,000 about 37 miles south of Kansas City. Platinum renovated the building and added short-term rehabilitation facilities. 

“There was no rehab option for local residents,” says Ben Klein, owner of Platinum Health Care based in Skokie, Ill. “The property is doing well.”

Platinum also owns and operates a nursing home in Fetus, Mo., a town of 11,000 about an hour south of St. Louis. The company recently expanded the facility and bought an assisted living property in the next town over, Herculaneum, Mo., population 3,600. “Small markets are not a negative,” says Klein.

Advocates of small markets say the areas are underserved. In fact, about 46.2 million people, or 15 percent of the U.S. population, lived in rural counties as of July 2012, according to the U.S. Census Bureau. Between 2010 and 2012, however, rural counties as a whole declined in population for the first time. 

Growing rural communities of 1,200 to 1,500 people can support a 32-unit assisted living facility, according to consultant Christiansen. Towns of 6,000 to 10,000 can probably support a 64-room facility. But, he cautions, developers need to build the right kind of seniors housing. 

One operator built a few upscale facilities in towns of about 6,000. “People wouldn’t move in,” says Christiansen. “It was too fancy.” Seniors in more rural areas are usually looking for simple, practical places.

A big advantage of owning and operating seniors housing communities in small markets is a ready pool of reliable workers, building operators say. Turnover is less of an issue in small towns where people put down roots and know each other. 

Workers are often taking care of their own relatives or friends, a fact that often improves the quality of service. Christiansen tells the story of a building manager of a small-town property who was acquainted with most of the local seniors or their families. As a result, she was able to keep the building fully occupied. “She knew who needed help,” he says.