Shortage of Affordable Senior Housing in Store, Critics Say

Southern California could face a shortage of so-called assisted-living facilities for seniors in the next few years, although there is plentiful capital chasing the senior housing market and a rush by developers to build assisted-living complexes.

The problem, industry observers say, is that developers are focusing on well-fixed retirees--those who can pay monthly rents of $2,500 or more--and overlooking those who must pay less.

“We’re going to have too much [housing] on the high end and too little on the low end,” said David W. Lacy, a Los Angeles broker specializing in the fast-growing senior housing market.

The tilt is unlikely to shift in California as long as debate continues about whether public funds should be used to support tenants in assisted-living facilities, which serve a healthier clientele than do nursing homes.

An assisted-living facility is typically an apartment complex in which residents live independently for the most part but are given some help in what the industry calls “activities of daily living” such as bathing or getting dressed. Residents of assisted-living complexes generally need more care than those in independent-living facilities but less care than those in nursing homes.

Investors, developers and lenders specializing in senior and medical facilities have been putting higher amounts of capital into assisted-living facilities in recent years, and at least three Southern California real estate investment trusts have significant investments in such facilities: G&L; Realty of Beverly Hills, Nationwide Health Properties of Newport Beach and LTC Properties of Oxnard.

G&L; recently spent $10 million to buy the 110-unit Pacific Gardens independent-living complex at 2nd Street and Idaho Avenue in Santa Monica and is converting it to an assisted-living facility, according to G&L; chief executive Dan Gottlieb. In addition, Gottlieb said, G&L; is spending about $10 million to develop new assisted-living complexes in Yorba Linda and near Rancho Bernardo in San Diego County.

Nationwide has investments in 78 and LTC has investments in 77 assisted-living facilities, according to the companies’ most recent annual reports.

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One reason for the popularity of assisted-living facilities, according to the LTC annual report, is that they represent a lower-cost long-term care alternative than skilled nursing facilities.

LTC executives could not comment Monday because the company is in a quiet period in connection with a stock offering. But the company’s latest annual report says LTC expects to focus on assisted-living facilities even more in the future.

REITs and other investors in assisted living cite U.S. Census Bureau statistics that say that the proportion of Americans 65 and older has gained steadily during this century. In 1994, 1 in 8 Americans was over 65, compared with 1 in 25 in 1900. By the year 2050, the Census Bureau estimates, 1 in 5 Americans will be over 65.

This graying of America has prompted “almost everybody and their brother to get into the act” of developing assisted-living facilities, Lacy notes, but, he said, the emphasis on upscale facilities in Southern California could hurt developers and investors in the future.

“Everybody is developing high-end projects at the same time, and that could cause rental rates to drop for the high-end product” by the time the projects are completed, he said.

Lacy said developers focus on the pricier projects because they generate larger profits. This makes sense from a developer’s perspective, he said, because the rents for assisted-living facilities for the most part are paid for with private money--there is little or none of the government assistance associated with nursing home residents.

“Probably 90% of it is private pay,” he said. “Insurance companies are starting to focus on providing long-term care insurance, but it’s still in its infancy.”

The bottom line, he said, is that developers have a hard time making money on the lower end of the market--assisted-living units that rent for $750 to $1,400 per month. To make such projects feasible, he said, local communities will need to lend support in the form of tax incentives and help in acquiring building sites.

Who will pay for assisted-living facilities is a thorny issue nationally, according to David S. Schless, executive director of the American Seniors Housing Assn. in Washington.

Schless said that although much private capital has poured into developing new facilities, the aging of the population is going to create an even greater demand for assisted-living complexes. A study by his association projects the number of assisted-living units in the U.S. would grow to 1.3 million by 2000, generating $33 billion in revenue. That compares with 600,000 and $12 billion in revenue in 1993.

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But Schless said some in the industry fear that if the government chooses to pay for seniors dwelling in assisted-living facilities, it would create a “woodwork effect” that would further increase the demand and strain the U.S. Treasury. “The fear is that if the government paid for assisted living, everybody who is now being cared for by spouses and children and all of those who are paying their own way would come out of the woodwork to take advantage of it,” Schless said. “The cost could be absolutely astronomical.”

On the other side of the argument, however, is the contention that government programs might ultimately save money by paying for assisted living.

About 20 states have adopted “Medicaid waiver programs” in which the states get federal authorization to pay for assisted living with funds that otherwise would go toward nursing home care, according to Lacy, who said California has not adopted such a program but is evaluating the potential impact of such a plan.

“The thinking is that if they can take people out of nursing homes and put them into assisted living when they really don’t need nursing care, the states can save money,” said Lacy, explaining that assisted living usually costs about half as much as nursing home care.

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States with Medicaid waivers are attractive to REITs such as LTC, which invests primarily in assisted-living facilities in states that have adopted Medicaid waiver programs or are in the process of adopting or reviewing their policies and reimbursement programs to provide funding for assisted-living residences, according to the LTC annual report.

In states such as California that haven’t adopted the Medicaid waiver, however, Lacy said, there is the concern that the larger number of seniors who might qualify for assisted living would more than compensate for the savings realized by moving some people from nursing homes to assisted living. In other words, the woodwork effect.

“The states want to be able to control their budgets. Their fear is that, instead of one person in a nursing home, they’ll have three in an assisted-living facility,” he said.

According to Schless, it’s a bit early to be assessing the effect of Medicaid waiver programs because the assisted-living issue has only recently arrived at the forefront of the senior housing business.

“The issue is one of funding, and it’s going to be part of our country’s ongoing debate on long-term care policy for a long time to come,” he said.