As the youngest baby boomers approach retirement, the number of retirees in the United States keeps growing, with many of them retiring as middle-income seniors. A study from the University of Chicago found the number of retirees within that segment will nearly double in the next 10 years. More than half of them will not be able to afford the yearly costs of $60,000 for assisted living rent and other expenses. Many will also not qualify for Medicaid to pay for long-term care needs, as that program is designed for lower-income individuals. They will likely be stuck in the middle, making too much for affordable senior housing options and not enough for the more upscale ones.

The so-called “forgotten middle” has been a hot topic for many owners and operators as they look to enhance the options with independent housing and assisted living, hoping to help those trapped in the middle gap. And as soon-to-be retirees explore housing options in Florida, Arizona, the Carolinas and other popular retirement states, a higher cost of living and a shortage of middle-market senior housing are raising concerns for those ready to embark on a fixed income lifestyle.

Construction costs for middle-market senior housing.

The rising construction costs limit the number of such developments. The incentives to build for middle-income seniors are nearly non-existent, as opposed to building lower income senior housing. According to Weitz Company, a general contractor with projects in many U.S. markets, at the end of 2022 the cost to build a mid-level assisted living project was between $226 and $306 per gross square foot — an increase from the $212 to $272 range for similar projects the year before (a 6.6%–12.5% increase). Additionally, the annual inflation rate for building costs, according to data from Engineering News Record, was 16.1% higher in 2022 than in 2021.

Rehabbing and modernizing existing senior housing are key.

To tackle the middle market senior housing gap, preserving existing senior housing is key. Rehabbing and modernizing properties to make them more relevant and appealing while keeping them cost-effective is a realistic strategy to help close the middle-income gap. It is a sensible way to expand the current selection without having to start from scratch.

One of the first steps to a successful modernization project is finding a knowledgeable lender with a deep understanding of the senior housing market landscape. An expert who is already familiar with potential obstacles owners and operators face — staffing issues, covenant challenges, case acuity, and occupancy concerns. Together, you can develop a plan to rehabilitate an aging property and make it market relevant.

Steps to consider when developing a rehab or modernization plan.

As part of that plan, owners and operators should work with their lender on the following considerations.

Analyze fee structures.

Review fees and fee structures to determine the optimal pricing model for the community. A financial partner can help assess if a rental-based model (with or without a community fee) or a co-op structure would make the most sense. Entrance fee models are less common in assisted living but lifecare options are available in continuing care retirement communities.

Enhance amenities.

Rebrand services and common areas to get the most out of your renovations. Owners and operators can work with their lender to identify the strongest physical assets and how they can be refurbished for maximum resident use. Create a wow factor that attracts more interest — new resident common areas, dining or fitness centers, for example.

Assess transition planning and costs.

Leverage an experienced financial partner who can help identify the healthcare financing solutions needed for the cost of residents being displaced as the capital improvements take place.

Consider strategic acquisition.

Take advantage of attractive distressed assets that can help owners and operators expand their portfolio, expand their footprint or become a regional leader. A lender can help identify the strengths and weaknesses of these existing properties, which could include office space, motels, or other assisted living communities that may have failed or are seeking an exit strategy.

Operators and owners are managing many moving parts, from delivering the right experience for current residents to handling operating cost pressures. Whether they are seeking to contract, expand, or invest in their respective properties, a lending partner should work collaboratively to handle and adapt to fluid market conditions.

We’re here to help.

With the number of older adults seeking housing options, they can afford growing exponentially, there is urgency and opportunity to make a real difference. Working together will allow the industry to continue to meet the needs of middle-income seniors and create meaningful housing solutions for what’s shaping up to be the largest segment of our retired population.

At Popular Bank, we provide healthcare financing solutions that can help you expand your business, complete an acquisition, or reduce your cost of capital. With decades of experience in healthcare lending, we understand the industry dynamics and the regulatory landscape to help set up customers for growth and success.