The rising senior housing demand and the increasing number of underperforming commercial real estate properties—hotels, office buildings, and even malls—have created a unique opportunity. Repurposing these assets into senior living communities provides cost-effective solutions to address the senior housing shortage.
The financial markets and the cost of construction have limited new senior housing construction in recent years, and senior living demand is rising rapidly – and figures to explode in the years ahead. Against that backdrop, senior living appears more promising than ever to owners of underperforming commercial real estate who are looking to convert a property to something more successful.
Struggling hotels and office buildings are properties that are attracting particular consideration for new lives in senior living. For instance, Todd Hudgins, senior vice president for senior living at Wisconsin-based ERDMAN, said that the volume of inquiries that ERDMAN has received from hotel owners about possible conversions has doubled over the past 18 months.
“If you look at the amount of units that are being built today, or if you look at the amount of senior living units that have been built in the in the highest volume year we’ve ever had, if we did that next year, it still pales in comparison to the demand that’s popping up every year,” Hudgins said. “We’re just not creating enough housing for seniors, and that hole that we’re digging ourselves is getting bigger and bigger. Senior living has a bit of a buzz right now because of all that demand, and so it shouldn’t be a surprise that people with an underperforming commercial asset might consider converting it to senior housing.”
Meanwhile, James Moyer, a partner with Illinois-based SAS Architects & Planners, said his company also is seeing more inquiries about conversion opportunities, particularly for office buildings that have struggled with vacancies since more workers began to work from home during the pandemic.
“I think a lot of these office building owners are thinking, ‘Hey, I’m not being able to rent my buildings – what are some alternative uses?’” Moyer said. “I’ve seen a lot of them wondering, ‘Can we put multi-family in here? Or would this be pretty good for senior living?’ We’re working with some commercial office building owners that are having us do feasibility studies to see exactly that.”
The benefits of a conversion can vary on the property but those facilities that are the best candidates for making the change to senior living typically can be repurposed faster than new construction would take – there is no foundation to pour or structure to erect – while also offering cost advantages.
“If you can build a brand-new community for $25 million, or you can build a similar size community out of an existing hotel for $15 million, you might choose the lower-cost option,” Hudgins said. “It can be a good option to meet the returns required by your investors, or just to meet the increasing demand in the middle market in senior living – today it’s pretty difficult to build brand-new housing for the middle market. Repurposing an existing building is a great way to keep the cost basis down.”
In addition, Moyer said, successfully repurposing a property without going through the process of razing it and starting all over has societal benefits.
“It’s really fun to take some of these existing buildings and say, ‘How can we reuse this and not have to tear it down and put everything in a landfill?’” Moyer said. “It’s really great for the environment. You’ve got these dead pieces of property that are located in wonderful locations in suburban and urban areas – let’s breathe new life into them.”
Assessing how office buildings work for repurposing
Moyer said some office buildings can lend themselves well to senior living, particularly if they have large floor plates – the amount of leasable square footage on an individual floor of a building.
“You want to have as much natural light as you can for all the apartments that are there, but if the floor plate works out usually office buildings are very flexible,” Moyer said. “There’s not a lot of bearing walls. There’s big spans, so you don’t have to carry out a lot of structure. Office buildings are, for the most part, made out of steel, and having a noncombustible building is very good for seniors. There’s typically higher floor-to-floor heights that help with getting in new mechanical systems and infrastructure. And a lot of times there’s maybe a parking garage or covered parking that lends itself for senior living because a lot of the independent living, or even assisted living, residents still drive cars.”
However, some office buildings can be more expensive to repurpose than it is to build from scratch on a vacant site, barring governmental incentives providing a boost, Moyer said.
“There’s also potential that behind the walls you might run into some structural problems or other problems that you don’t really see until you start the construction process,” Moyer said. “And then you need a lot of remedial repairs that you have to take care of before you can start renovating the building.”
Hudgins said ERDMAN is assessing an underperforming office building for conversion to senior living at the moment and believes many more will be considered in the future.
“I believe we’ll see more and more of different asset classes looking at the space to see if they can convert, unless things wildly change,” Hudgins said. “In general, there’s a lot of office space out there available, and it’s very difficult to rent. And so if there’s a building that’s even close to checking off a few of those boxes, that might be worth assessing if it can be converted to senior living.”
Hotels can prove hospitable to conversions
Hudgins believes that a building previously used for some type of housing makes for the best candidates for repurposing for senior living, and that includes certain types of hotels.
“If one of the goals is to try and repurpose a building for the purposes of keeping the cost basis down, you’re likely going to have some of the infrastructure required – in other words, a bunch of rooms with a bunch of doors, and in the best-case scenario, they’ve already got a bunch of bathrooms,” Hudgins said. “For that purpose, we look at hotels. We’re probably looking at and assessing four different hotel projects right now. They’re underperforming since COVID. They haven’t been able to stabilize as a hospitality asset, and so they’re considering moving to senior housing. But it’s not always as easy as it sounds.”
Hudgins said that typically a hotel that has a suites format and more square footage in each room will allow for more diversity in the units and be a strong candidate for conversion.
“You might be able to get some actual one-bedrooms in there, and you may be able to create some studios without a whole lot of change in terms of wall placement and extensive renovation,” Hudgins said. “Conference hotels are good candidates because they have a tremendous amount of common space. A conference hotel likely has a full kitchen already, but it may not have full dining, but you can use some of that conference space to make up dining and to make up some really great common areas that can be used for various different things in a senior living community.”
Of course, the conversion also must be an actual conversion to senior living – simply changing the signs, making a few adjustments and keeping the feel of a hotel intact will create sales and marketing challenges for the new community.
“If you can’t make a hotel look residential like a senior living community – if you can’t make it attractive to senior living potential residents and their adult children – then you may have a difficult time leasing it up,” Hudgins said.
If it can be converted, should it?
Whether a senior living community is a former office building or hotel – or a repurposed facility or a brand-new one – location remains critical. Hudgins said the largest challenge with any senior living community – whether it is a new building or a conversion – is the “fundamental demand.” Hudgins said he is aware of conversions that have not worked due to location and lack of demand, but he also has seen conversions prove “wildly successful” in other instances that were better suited for the market.
“Just because you have a hotel with the perfect layout that would make a fantastic senior living community doesn’t mean it’ll be successful if there’s not a demand for senior living housing in that individual market,” Hudgins said. “The biggest hurdle is demand.”
Hudgins said it is ideal to have a walkable setting with resources such as restaurants, grocery stores and shopping nearby, but they are not “deal killers” for a conversion.
Moyer said the financial advantages of a conversion could depend on whether it is in a suburban or urban location.
“It’s more financially feasible in urban areas where land’s very scarce, and the cost for land is very expensive, so it makes sense to reuse some of those buildings in large urban areas,” Moyer said. “What’s nice about that, too, is a lot of times there’s infrastructure built up around there. You’ve got transit, you’ve got restaurants, you’ve got theaters, you’ve got shopping.”
Conversely, Moyer said suburban areas with more inexpensive land available might not provide as large a financial advantage over new construction. Being able to secure financial incentives, such as in the case of historic buildings, also can play an integral part in making repurposing buildings feasible, Moyer said.
Conversions, of course, also must meet licensing, code and zoning requirements.
“One of the biggest hurdles is code compliance and zoning – can it be zoned for senior living, and does the physical plant meet the current code for senior living in that area,” Hudgins said. “And then beyond that, there’s 10 or 15 other check boxes that need to be checked in terms of the infrastructure and cost.”
Hudgins said ERDMAN has evaluated dozens of properties for conversion to senior living housing that have not checked all the boxes for a project to go forward, and the most common obstacle was property owners not being aware of how much work the conversion would take.
Hudgins said the architectural and engineering efforts to convert a suitable building to senior living is not necessarily the challenging part of the process – rather it’s if the cost to convert it will be in line with an investor’s return requirements.
“You’re likely doing this because you need to provide senior housing at a lower cost, or you need to convert an underperforming asset into a better performing asset, but you always have your cost basis plus the cost to renovate,” Hudgins said. “You want to make sure that whatever your plan is will keep your cost basis below replacement costs, of course, so that you can be competitive.”
A busy future
Both Hudgins and Moyer said they anticipate the interest in repurposing existing buildings into senior living to skyrocket in the coming years. Moyer said he is seeing senior living exploring “some unusual locations that I’ve never seen before.”
“We’re working on two really exciting projects in our office right now where we’re going into shopping malls that are being redeveloped – they’re taking away the big boxes and getting rid of the internal focus and rotating the shopping around so it’s facing the outside – and they’re putting in housing around the perimeter, and now we’re introducing senior housing into those mall developments,” Moyer said. “And it might seem odd at first, but if you think about it it’s really nice for the seniors, because right outside their door, they’ve got the restaurants, they’ve got the shopping. Sometimes there’s clinics, there’s pharmacies, there’s theaters.”
The need for senior housing units promises to simply drive interest to new heights.
“We’re going to need way more housing than the senior living community of owners and operators can produce themselves over the next 10 years, so we’re gonna have to get creative and create housing out of thin air,” Hudgins said. “And one of those places is going to be converting underperforming assets that exist already.”
Moyer agreed, saying, “We can’t wait around anymore.”
“I think everything’s on the table in terms of getting more senior living options out there for people,” Moyer said. “If it’s taking over some of these vacant office buildings or other underutilized locations, then we’ve got to do it. We should be looking at everything we can.”
