The Investment Thesis for Active Adult Rental Communities — Episode 1

Caroline Clapp: Hi everyone, and welcome to NIC’s Active Adult podcast series. Thank you to Treplus Property Management for sponsoring our NIC Chats podcast series on active adult. From pre-lease to operations to lifestyle engagement, TPM’s full-service management solutions are purpose-built for active adult communities designed to maximize NOI for owners and investors. 

I’m Caroline Clapp, Senior Principal on the Research team at NIC, which is the National Investment Center for Seniors Housing & Care. We are a nonprofit real estate research organization focused on senior housing. 

One of NIC’s subject matter areas is active adult rental communities, which NIC defines as age-eligible, market-rate, multifamily rental properties that are focused on enhanced lifestyle programming without providing meals. Those are the parameters that NIC MAP uses to track active adult rental communities. 

Now, welcome to Episode 1 in NIC’s Active Adult podcast series. Our guest is Ben Burke, Managing Partner of Headwaters Group, which is a Denver-based, vertically integrated developer and operator of active adult 55+ rental communities. Ben will cover this episode’s topic: the investment thesis for active adult rental communities. 

Thanks for joining us, Ben. Welcome. 

Ben Burke: Hey, thanks for having me. 

Caroline Clapp: To kick it off, tell us about your background and what drew you to active adult and the founding of Headwaters Group. 

Ben Burke: Absolutely. Thank you. 

My background, I come from the traditional seniors housing space, having worked for two different vertically integrated owner-operator developers who acquired and developed independent living, assisted living, and memory care. 

And I love the senior living space, from active adult all the way through skilled nursing and beyond. We saw a great opportunity to sort of fill a gap in the senior living housing space, and generally the housing space through active adult. Really, there’s not much housing between traditional multifamily and full-service, sort of seniors housing starting with independent living, and there’s a big gap in ages, and there’s a big gap in price points. 

Ben Burke: We saw some early adopters having some initial success, but also learning a ton, and we thought that we could really put our stamp on the active adult space. So we started Headwaters Group to add age-restricted, 55+ active adult product into the market and use our seniors housing expertise. 

But we also have members of our team from the multifamily world and the hospitality world. So, putting everyone together, we thought that we could create some special communities. 

Caroline Clapp: Oh, that’s a great intro. Thank you. 

Similar to where you’re going with the different sides, right now I’m going to show a slide of what’s included in active adult communities. 

So: shelter, security, lifestyle and engagement, recreation, wellness, and then also what isn’t included, such as the services that are offered in traditional independent living. 

So, for a capital partner or an investor who might not be as familiar with active adult, how would you describe what makes active adult distinct, both from conventional multifamily and from traditional senior living? 

Ben Burke: Yeah. I mean, ultimately, active adult is a great mix of both traditional senior living and multifamily. 

I think from a sales perspective, a resident perspective, and a resident engagement perspective, it’s very much like senior living. A lot of folks are moving out of their homes. They haven’t been living in other rental environments. So the sales process takes longer, and you have slower lease-ups. 

But once folks move in, they stay a lot longer, mainly because, one, they treat it like home because they’ve been living in a home, generally, for 30-plus years, and that’s all they know. 

And then, two, we engage them. These folks, unlike in multifamily where people wake up, go to work, come home, and go to sleep, active adult residents wake up, go downstairs, and want to be entertained, and they want to socialize. 

Ben Burke: So we create a very robust engagement program for them. It’s not overly staffed. We don’t think it needs to be. In fact, in the best communities, a lot of these activities are resident-led, but supported by the community. And folks love it. They make a lot of friends. 

Oftentimes, this is one of the most social periods of their lives when they’re with us, and that helps keep them longer and make them happier. 

And then on the expense side, so I would say the revenue side, the leasing side, the engagement side, is very senior living-like. 

And then on the expense side, it’s very multifamily-like. We generally have anywhere from three to six team members, generally four to five. It’s really staffed like a multifamily community. We do have someone who specializes in engagement activities and concierge services. 

But like I said, oftentimes it’s resident-directed and staff-led. And it isn’t too heavy a lift, especially when we program the clubhouse appropriately to allow those activities to happen naturally, with rooms for fitness, health and wellness, libraries for reading, puzzling, and games, sports areas, sports lounges for watching the games, happy hours, and stuff. 

If you build it right and you put the right team in there, it can be activated very easily. 

Caroline Clapp: That’s a great description. 

So, as you said, the revenue side looks more like senior housing, in terms of who your residents might be. But on the expense side, it’s more like multifamily, with a lot less overhead. 

Yes. Okay, great. 

So, diving into the demand side, what are some of the most compelling demand drivers that make active adult, in your view, one of the most attractive places to invest in real estate right now? 

Ben Burke: Sure. I mean, from the demand driver, obviously, being a senior living person, the growth of the cohort is well known. 

And what we really like about where we’re working in the senior living spectrum is that we’re on the early side. We’re catching that resident first, sort of, of the baby boomers coming through. We can really understand that resident, and then I think we can help them sort of work through the continuum over time and as our business grows. 

But yeah, it’s the leading edge. It’s a very large demographic. In fact, the 65-plus population is estimated to grow 32 million over the next 20 years, which is seven times the nation, right? We project internally about 230 units of demand annually at existing penetration rates. 

And, right now— 

Caroline Clapp: 230,000. 

Ben Burke: 230,000, yeah. 

And there’s only about 60,000 units of existing supply, or maybe, I think, NIC tracks it a little closer to 100,000. And those units are 94-and-change, 95% occupied on a stabilized basis, and I think low 90s if you do everything, including lease-ups. 

Right there, you just see very limited supply and a lot of demand pushing those occupancy rates higher. And obviously, with the growth behind it, we feel very confident in the demand. 

And then, furthermore, the wealth and income of the demand in our segment versus maybe traditional multifamily. We have residents who have investment accounts that they’ve had for most of their lives. And the boomer population is a wealthy cohort. So they have the ability to rent, plus they are further backstopped, sort of, with U.S. government credit, with Social Security benefits, and health insurance through Medicare. 

Caroline Clapp: Yeah. Okay. Yep, that’s a great description of the demand there. 

And then also, you started to touch on inventory, so that’s a good segue into active adult inventory. So I’ll put a slide up now, and it’s showing the active adult rental inventory by the year each property opened. 

And I think what you’re were describing when you said about 60,000, I’ve heard investors sort of make this divide. 

Caroline Clapp: So there are older properties that look different. They’re maybe a bit more age-restricted. They’re naturally occurring retirement communities. They also have very high occupancy rates. 

But what we’re describing today, and talking about from the investment side, are the more modern properties. So that might be the 60,000 that you’re talking about. 

As you can see, a little more than a third of this inventory has opened since 2019, and about half of it has opened in the past 10 years. This chart maybe looks dramatic, but it’s really only a few thousand units per year. 

So how do you think about where we are in the supply cycle, and how does Headwaters evaluate whether a given submarket has room for a new community? 

Ben Burke: Yeah. I mean, I think that we are chronically undersupplied for the product, to begin with, off of its base. And I think, from the reporting that you have here, we’re delivering about 7,000 units annually off of a very large deficit. 

We’re not making up any ground. 

With all that said, those are national-level statistics, and maybe that leads us to this strategy. But on any given deal, all that matters is what’s in your market and not having coterminous lease-ups. That’s our number one thing. We’ve seen throughout our careers in seniors housing that lease-ups occurring at the same time put a lot of pressure on rent and a lot of pressure on absorption. 

So we do whatever we can to locate our properties in areas that have the lowest potential for another property opening around the same time or during our lease-up. 

Caroline Clapp: Okay. Yep, that makes sense. 

And then, similar to that, you’re concentrated in the Denver metro area. You’ve got some sites in Salt Lake City and Scottsdale, so Sun Belt and Mountain West markets. 

Give us a little idea of the ideal submarket and what might make you pass on a site. You mentioned other competition opening at the same time, but what else are you looking for, and what are you not looking for? 

Ben Burke: Yeah, I mean, I’d say we’re generally in first- and second-ring suburbs. We sort of look at it as a seniors housing investor. 

We want to be where the adult daughter is with the grandchild. Our core customer is a 73-year-old single woman, widowed, divorced, or never married, but with grandchildren. They want to live close to their grandchildren, help out, and be around their adult daughter. That’s a very seniors housing demand driver. 

Where are those adult daughters and grandchildren? They’re generally in first- and second-ring suburbs with great schools, nice homes, good home values, good incomes, and low crime rates. I would generically call them Trader Joe’s and Whole Foods suburban markets. That’s where we see our residents most preferring to live. 

Assuming it’s in one of those areas to begin with, I’d say we really look at the micro-location. We want to have great walkability. We’re less concerned about walkability to restaurants, bars, and shopping. We prefer walkability to walking trails, nature, and the types of things our residents really enjoy. 

So we look at the micro-location, we look at the neighbors, and then definitely supply. Over the last four or five years, supply hasn’t been an issue because we haven’t seen any new supply in our submarkets, which is great. 

I think over time that will evolve and change. So we’re very much looking at who’s planning deals or talking about deals. We want to be very ingrained in our market and know who’s coming in at any given time. 

Caroline Clapp: Yeah. Okay. Yeah, that makes a lot of sense on the site selection as well. 

So, moving into branding, you launched the Aspendail brand. You talked about hospitality, so that’s the umbrella for your portfolio. What does the brand stand for in the mind of a prospective resident, and how does it inform how you’re going to design your communities physically and the programming that you’re going to implement across them? 

Ben Burke: Sure. Yeah. I mean, Aspendail—we found it very important to brand our communities. 

Aspendail is a brand that really focuses on our communities, mainly in the Mountain West and Southwest. A lot of our sites are near walking trails and have views of the mountains. 

Aspendail was created to represent the resident who likes being active and getting outdoors. We have robust outdoor spaces, I think more than most of our competitors, in all of our communities, partially due to where they’re located. A lot of our communities are located on bike trails or walking trails. 

So the Aspendail brand, through imagery and color, matches that environment. A lot of our imagery, messaging, language, and copy speak to an adventurous spirit—someone who wants to be adventurous not only in the housing they choose, because this is somewhat of a new style of housing, but also in their life generally: getting outdoors, moving around, being active, being healthy, and wanting to live with people who are like-minded. 

Caroline Clapp: No, that’s great, because I know a lot of the programming is, as everyone says, very resident-specific. But it sounds like, with the brand, you’re going for something that’s recognizable as well in what you’re offering. 

And you started to touch on occupancy rates, so let’s dig a little further into that. 

I’m going to put a slide up right now that shows NIC MAP occupancy rates that are above 90% on average, both for all properties and for stabilized properties. 

When you’re underwriting, for whoever’s listening today about underwriting and pro forma, let’s talk about what your key assumptions are. What is a good lease-up pace? What does stabilized occupancy mean? What’s the definition? Where should it be? And rental rate… rent growth as well. Has that evolved over time since you’ve been working in active adult? 

Ben Burke: Yeah. I think that we underwrite 30% pre-leased and six units a month of demand, minimum. Generally, being conservative, that’s how we think about it. 

From a rate perspective, it’s interesting. In our portfolio, we’re leasing our communities at, call it, a 10% to 20% premium to multifamily. That’s generally what we’re banking on, although most of our residents do not shop multifamily. Multifamily is just everywhere. There’s so much of it, and it’s a pretty efficient data point to benchmark against. 

So we’re generally 10% to 15% above multifamily, but I think what’s interesting is that, once you’re in stabilization, you’re seeing returns in excess of that, which is a great part of the investment thesis for active adult. 

Once again, especially because a lot of our portfolio is development, the biggest risk in active adult is getting the lease-up wrong, whether that’s rent discovery, absorption, location, or running into new supply. The lease-up is slow. It’s hard. You see lease-ups stall out, and then they take longer, especially when some level of turnover arrives. 

But once you’re there, what we’re seeing in our portfolio is a lot of rent growth potential and a lot of mark-to-market potential. One reason is that turnover is so low that you’re not leasing as many units to stay full, and therefore you can drive revenue that way. That’s a big part of it. 

The second reason is that, at least in our portfolio, when you’re in lease-up, your rents are lease-up rents, and you’re driving toward velocity to get to stabilization during what is a slow lease-up period. Once you get there, we see significant mark-to-market opportunities because you’ve used incentive rates to drive lease-up and reach stabilization. 

So we love this. If you can lease it up and underwrite that correctly, we love it from a development perspective. But we also really love it from an acquisition standpoint because we think there’s a lot of outsized revenue growth compared to multifamily. 

Caroline Clapp: Okay. That’s really great information. Thank you. 

Caroline Clapp: And then, moving into amenities, you talked about site selection being close to trails. But I’m going to put a slide up here showing the top 10 active adult amenities that are tracked by NIC MAP. At the top of the list are things like fitness centers, pools, the clubhouse, and an activities coordinator, so a lifestyle and engagement director. 

Amenity-wise, how do you think about the right level of amenity investment when you’re underwriting your developments? 

Ben Burke: Yeah. I mean, I think it’s location-, submarket-, and competitor-specific. 

I will say a general trend that we’re seeing in the space is toward wellness. I think if you go into a traditional senior living community, and this is evolving, but 10 years ago people weren’t using the fitness and wellness areas as much. 

Today, when we go into a traditional senior living community, we’re seeing them use those spaces more. In our active adult communities, they’re always full, especially in the mornings. 

So we’re focusing heavily on opportunities for wellness and fitness. Then I think the other priority is always areas to socialize, whether that’s for coffee, newspapers and breakfast, or happy hours. 

Our residents like to be together and commune, so we try to have areas for them to gather, chat, and hang out. It’s great to see. It’s one of my favorite parts of the space. 

Caroline Clapp: Okay, that’s great. Thank you. 

A couple of other episodes will cover resident programming as well, along with the use of these amenities and how to make the best use of them. 

So, moving into Aspendail Scottsdale, it has a very distinct design. It’s inspired by Frank Lloyd Wright and includes some single-story cottages. 

What does that say about how this product type differs from your Denver-area communities? And what does it tell us about the flexibility of the active adult model and the different product types? 

Ben Burke: Yeah. I mean, we’re very proud to have designed our community with Frank Lloyd Wright architecture in mind and to incorporate that design. In Scottsdale, we sit on Frank Lloyd Wright Boulevard, right below Taliesin, which is a Frank Lloyd Wright museum. 

We thought it would fit the area best, which is what we always try to do: incorporate a design that matches the surroundings, fits the area, and differentiates us. 

As it relates to the cottage product, we’re a little under half a year away from opening that community, and I believe we’re nearly sold out of those cottages. So we’re seeing very strong demand for that cottage product. 

We only have 10 cottage units out of 171 total units in the community, but I think those were some of the first to go, despite being among the highest price points. 

So I think it goes to show that the cottage product is really desirable. In fact, we’re looking for opportunities to diversify our product offering on a campus-style setting with more cottages, or even an entire community of cottage or patio-home-for-rent product geared toward our age-restricted customer. 

Caroline Clapp: Yeah. That makes a lot of sense. We’ve heard that the cottage, or just single-story living, is a great way to help people downsize and make that first move out of a single-family home into a rental community. 

Okay, so moving into the capital markets, how is Headwaters capitalizing its development pipeline today, and how have things changed in the capital-raising environment over the last 12 to 18 months? 

Ben Burke: Yeah. So we’re capitalizing our development pipeline today through a programmatic joint venture with an institutional equity group that’s a very large investor in the segment. 

Caroline Clapp: Oh. 

Ben Burke: We capitalize our deals with them. Then we use traditional construction loans, and we have our own discretionary GP fund that co-invests in every deal. 

Ben Burke: How has it changed? I mean, it’s tough. It’s really tough. 

I think that, especially since a lot of the folks that track active adult have traditionally been multifamily investors, rising interest rates on relatively lower terminal cap rates have had an effect on terminal valuations. 

There haven’t been as many transactions that support new development over the last 12 to 18 months. Now, with that said, we’re seeing that change quickly, especially as investors who are more focused on senior living are learning more and more about active adult. 

We’re seeing really strong interest in our space, and we’re starting to see sales that support new development in the active adult sector. 

We really pride ourselves on being able to drive our basis down while still providing a really interesting product. As a developer, that’s a great way to operate during times when it’s harder to get deals done. 

Caroline Clapp: Yeah. No, that’s a really good point. I know at NIC MAP they’re tracking transactions, but it’s still very thin, as you said, so they haven’t really been able to report a lot of metrics from that data. 

So the last slide I’ll put up highlights the many active adult resources we have available from NIC and NIC MAP. It’s based on NIC MAP data, but it’s also informed by people like you who volunteer on our committees and help provide information for the industry and educate new entrants into the space. 

What do you see as the biggest risk to the active adult thesis today? You touched on the capital environment from a macro perspective, but maybe a risk that’s specific to the operator or developer, something that’s more within your control to manage. 

Ben Burke: Yeah. I mean, I think that supply is always a risk. 

As you’re seeing transactions that might support new development, you might see new folks enter the space. However, I do think there’s a moat around active adult in that way because, generally, senior living folks focus on senior living, and multifamily folks focus on multifamily. There aren’t a whole lot of us who focus specifically on active adult. 

So we aren’t seeing too much crowding in that space. 

I also think we want to continue to see our operating and management partners, as well as owners, prioritize resident quality and not get lazy around resident engagement. Ultimately, that’s our secret sauce: keeping our residents engaged, happy, and connected. 

If we’re not doing that well, our product just isn’t as special and doesn’t command the same rents or the low turnover that we’re seeing right now. 

So I would say a continual focus on improving our product is going to be critical for the sector, along with keeping our eye on supply. 

Caroline Clapp: Yeah. Okay. Thanks so much. That’s a really good outlook. 

Thank you to Ben Burke, our guest today, Managing Partner of Headwaters Group, who covered today’s episode on the investment thesis for active adult rental communities. 

Thank you to our listeners for joining this episode of NIC’s Active Adult podcast series. 

You can find additional podcasts on our website at nic.org or wherever you listen to podcasts. 

And thanks again to Treplus Property Management for sponsoring this episode.