There are pros and cons to developing seniors housing in Canada today. Brian Kimmel, Assistant Vice President, Commercial Financing, discusses the trends and where the industry is headed.
Q: Some people say it’s a great time to develop seniors housing in Canada, others say it couldn’t be more challenging. Which is correct?
BK: Both are actually. On the positive side, debt and equity capital are readily available. However, the industry has also never been so capital intensive, dominated by well-capitalized players.
Q: Are there new players entering the market?
BK: Absolutely. With the growth of Canadian seniors housing into a multi-billion dollar market, banks, investment dealers, pension funds, REITs and foreign investors are intrigued by the potential economies of scale for their investments.
Q: What else has made seniors housing so attractive?
BK: The boom in real estate investment in Canada by institutional investors and the favourable demographics of an aging population has also made seniors housing a desired investment.
Q: Why are developers in such an advantageous position?
BK: It is now possible for a developer to raise up to 100 per cent of the required equity and debt for a well-planned project in a good location within Canada. With multiple sources of equity and debt financing, developers have stronger negotiating power. Compared to 20 years ago, a developer was lucky to get debt financing for 65 per cent of his development cost and had to invest his own money or ask family and friends for the equity portion of the deal.
Q: Have seniors’ demands changed as well?
BK: Certainly. As the industry flourishes in Canada, so have the expectations of wealthier seniors for larger and more luxurious accommodations. This demand has developed so rapidly during the past few years that we are now seeing private retirement homes that can rival a Four Seasons hotel. And the trend is only intensifying.
Q: How are evolving care models affecting development?
BK: Some new retirement home developments offer a full continuum of care, from independent living to assisted living to full memory care for seniors with dementia. As a result, the development costs of these new properties have risen dramatically, sometimes exceeding high-end condominium units on a price per unit basis. Catering to wealthy seniors requires investments of up to $500,000/suite, which is only possible for developers with deep pockets.
Q: So are all of these new seniors development full?
BK: Despite the growing demand for seniors housing in Canada, it is no longer a case of “build it and they will come.” There is a significant amount of supply right across the country, and seniors housing developers are competing for residents who can afford to pay very high rents (rents have risen from less than $2,000/month to $5,000/month or more). Annual turnover rates of 30-40 per cent are also forcing property owners to continually promote in order to keep their homes filled. At one time, marketing was a nice to have. Now, it’s a need to have. And it can be costly.
Q: How are these higher costs impacting the industry as a whole?
BK: With the significant costs involved in both developing and marketing the “modern” retirement home, the industry is consolidating under very large and well-capitalized developers/owners who often have institutional money backing them. Smaller developers are struggling to compete, and I fear that they may become an endangered species in the not-too-distant future.