In the face of adverse economic conditions, developers have shifted their focus away from single-family residential and commercial projects to senior-living communities because they are considered a high-performing asset class. Although the assisted living segment has become somewhat overbedded, strong demand still exists for facilities that specialize in Alzheimer’s and dementia care.

The National Investment Center for the Seniors Housing & Care Industry reports that the median assisted living penetration rate among the top 100 Metropolitan Statistical Areas is 60.9%, while the median memory care penetration rate is 20.4%. Penetration rates represent the relationship between supply and demand. Lower penetration rates indicate better growth opportunities.

The Alzheimer’s Association estimates that more than 5 million Americans have Alzheimer’s disease or a form of dementia. That number is expected to increase 10% in 2010. While demand is increasing, market studies show that most Alzheimer’s and dementia care facilities have high occupancy rates.
Now is a good time to invest in this niche. Some developers report a 20% to 50% internal rate of return over a five-year period on Alzheimer’s and dementia care development projects. However, before entering into an Alzheimer’s and dementia care project, developers should undertake a three-step process:

1. Consider new development or transforming an assisted living community into an Alzheimer’s care facility: Acquisition of an existing Alzheimer’s and dementia care facility typically does not provide the greatest return on investment, as most facilities in this specialty area are performing well. Instead, consider developing a facility from the ground up in a strong market.

Some investors in Florida also have been successful in purchasing small, underperforming assisted living facilities with 60 units or less that are located in markets where the demand for assisted living is low. In this type of market, turning a small facility into an intimate Alzheimer’s and dementia care community is a viable option.

2. Size up the competitive landscape: The location of the facility is not as critical as competitive saturation of the market. It’s wise to take a good look at area competitors, their performance and facility occupancy levels. This approach will help determine optimal rental rates, amenities and services a facility needs to be competitive in the market, as well as the project’s ultimate profitability.

Understanding the competitive landscape of the market is key when determining rental rates for a new facility. It’s important to choose a market that has proven it’s capable of sustaining high enough rental rates to offset the cost of construction. And in a market with high demand, a new Alzheimer’s and dementia care facility with amenities and services that are superior to those of competitors can merit higher rates.

3. Align with an experienced operator from the start: The ability to secure funding for a project is directly tied to the track record of the management company a developer chooses to operate the facility. Success in Alzheimer’s and dementia care also is dependent on the quality of programming and care, which are provided by the operator.

The management company must have a reputation that commands respect within the community. An operator that offers top-notch amenities, and who brings an outstanding reputation for care and programming to help keep residents active for as long as possible, can perform well even in highly competitive markets for Alzheimer’s and dementia care.

Developers new to the industry should be aware that senior living facilities are not a typical real estate investment. A property’s value is driven by the facility’s operation, rather than the value of its real estate. In that respect, it’s akin to determining hotel valuations. A few hotel firms have dabbled in the niche, including Renaissance Hotels.

Partnering with a reputable management company that understands the needs of potential residents from the start of the development project will put the investment on the right track for success.

Alex Lopez is director of business development for Senior Management Advisors (SMA), an operator of seniors housing communities in Florida and Georgia specializing in rejuvenating facilities. He can be reached at alopez@smaservices.net.