FEATURE ARTICLE, SEPTEMBER 2008

SENIOR LIVING PROS HAVE SEEN THE CYCLE BEFORE
The senior housing sector has been impacted by the same economic factors as the rest of the commercial real estate industry, but veteran Midwest development and acquisition companies have continued at a steady clip.
Kevin Jeselnik

Senior Lifestyle Corporation’s Senior Suites independent living concept, which has locations throughout the city of Chicago, features modern, affordable apartment homes for senior citizens.

In news that should come as no surprise, the senior housing sector is fighting through the same challenges that other commercial real estate property types are dealing with this year. However, the industry is weathering the storm well, and activity has continued in spite of any problems.

“Like everything else, we are certainly feeling the effects of the economy,” says Jerry Frumm, executive vice president of Senior Lifestyle Corporation, a Chicago-based developer and owner of independent and assisted-living properties in 15 states across the country. ”Our product is one, that for the most part, involves people moving out of their homes. If the home sale market is depressed as it is now, people can’t or won’t sell their homes.”

Even as some potential residents of the independent living facilities that comprise a majority of Senior Lifestyle Corporation’s portfolio, the company is making its way through the murky waters of the current commercial real estate market.

“Notwithstanding the outside challenges, we are holding our own pretty well,” Frumm notes. “While we are seeing some occupancy drop and experiencing a longer decision-making process from prospective residents, we have been able to stabilize our portfolio in the face of this economy.”

The company continues to develop centers, with a heavy focus on Chicago and its surrounding submarkets, while primarily growing through the acquisition of existing communities.

“With the seniors business, the greatest opportunity play is in acquiring existing communities,” Frumm explains. “You don’t have to go through the entire development process in order to get a building up and running, and generating income. That being said, we always have a shovel in the ground, but we’ve really acquired more than we’ve developed over the past few years.”

Senior Lifestyle Corporation has a portfolio of approximately 70 communities with 8,500 units across 15 states.  The company has continued to grow in spite of the difficult financing situation most developers and investors are facing when making moves in commercial real estate. Frumm notes the differences in obtaining loans from 18 months ago to present. The conduit market has completely dried up, and banks are hesitant to lend, even with tightened credit standards, higher coverages, more covenants and lower loan-to-value ratios.

“There are still some REITs in the market looking to finance, and there are a lot of traditional construction lenders out there, but they are being very cautious about it,” he says. “Despite all of their difficulties, Fannie Mae and Freddie Mac are very active in our business. We just completed a very large Fannie Mae refinancing, and we have an acquisition now in the works that we’ll utilize some Freddie Mac financing on.”

The company’s primary development initiative now is its Senior Suites concept. The affordable communities are found throughout Chicago, and the company recently opened its first suburban location outside of the city, a 90-unit property located in a former YMCA building in Joliet, Illinois.

“The Joliet project is a community that we accomplished with a lot of interesting funding programs,” Frumm says. The development was funding using financing from a collection of sources, including the Federal Home Loan Bank of Chicago, the Illinois Housing Development Authority, Harris Bank and the Joliet City Center Partnership.

Two more Senior Suites are in the works within the Windy City, and a third is being planned for the suburb of Blue Island, Illinois.

In Northbrook, Illinois, the developer is working to gain zoning approvals for a high-end independent living community, which will be called Arbor Bay.

“With the condo market pretty dried up, we are seeing a lot of good land sites that perhaps weren’t available to us 3 to 5 years ago,” Frumm notes. “This is a great opportunity for us to look at some really good development sites that we can get. By the time we go through zoning approval and put the shovel in the ground, give or take an 18-month construction process, we’d like to think that the economy will  be starting to turn the corner and improving.”

One of the motivations driving Senior Lifestyle Corporation to continue with its current development plans is a confidence that the market will rebound in the next 18 to 24 months.

“Part of our thinking is that a lot of seniors that would otherwise have made the move [to independent living] may be choosing to stay at home because they are having difficulty selling their house, or perceive that selling their house will be difficult,” Frumm says. “When that market begins to turn around, there will be a whole lot of pent-up demand.”

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