Today’s Development Climate Isn’t Unique In History, Says Interface Panel

By Matt Valley

Similarities exist between today’s challenging development environment and what transpired during the Great Recession (2007 to 2009) and its aftermath, says Bill Pettit, managing partner of Black Dog Capital Advisors, a Seattle-based consulting firm specializing in seniors housing. 

Editor’s note: InterFace Conference Group, a division of France Media Inc., produces networking and educational conferences for commercial real estate executives. To sign up for email announcements about specific events, visit www.interfaceconferencegroup.com/subscribe.

When the Great Recession hit, Pettit was in the midst of a more than 30-year run as president of Seattle-based Merrill Gardens, which currently operates more than 60 senior living communities, with a heavy presence in California and Washington.

“At Merrill Gardens, we built one project a year during the [Great Recession], and the only way we built them was essentially investing capital, 45 percent of cost, to get a bank loan of 55 percent (loan to cost) at that point in time.”

“Candidly, each of those buildings turned out to be some of the most profitable buildings we ever built,” said Pettit, referring to Merrill Gardens communities completed from 2011 to 2013. Not only had consumer demand picked up by that point, but there also wasn’t a whole lot of new competing supply.

“If you think about everything we heard today about the markets, about who’s financing development — or more likely who isn’t financing development — you can see a lot of the same similarities.”

Pettit’s comments came during a development panel discussion on Feb. 11 at InterFace Seniors Housing West. Co-hosted by France Media’s InterFace Conference Group and Seniors Housing Business, the event attracted nearly 240 industry professionals.

Titled “Rebounding Development Market: When Will Development Come All the Way Back,” the panel also included session moderator Ben Seager, principal of architectural firm KTGY; Josh Johnson, CEO of Momentum Senior Living; Paul Mullin, co-founder and principal of Flatiron Development Group; and Rob Leinbach, senior vice president of growth initiatives for Cogir Senior Living.

It’s only a matter of time before commercial banks jump back into the construction lending game, Pettit believes. “I think they will because policy and credit committees are starting to turn their attention to where the next growth in assets is going to be to replace assets that are running off [the balance sheet].”

When the commercial banks do get off the sidelines, expect the loans to be structured conservatively as part of a capital stack, said Pettit. “The returns are going to be good for those that can get those projects up and running.”

The period from 1999 to 2000, when operators couldn’t properly staff the rapid influx of assisted living communities due to overexpansion, is also instructive, said Pettit.

“If we get a whole bunch of new supply after we lost so many team members during COVID, it’s going to be hard to find experienced staff to run and lease up new buildings,” emphasized Pettit, referring to the high number of workers in seniors housing that quit during the pandemic due to either burnout or health risks.

Is it Still Cheaper to Buy Than Build?

Many limited partner (LP) equity sources have been reluctant to invest in seniors housing development projects over the past two years because they say they can buy existing communities at a discount to replacement cost, according to Leinbach of Cogir Senior Living. The Montreal-based company is one of the largest seniors housing operators in Canada, with more 200 communities in the country and over 100 in the United States.

But Leinbach knows for a fact that at least some buyers are paying above replacement cost for Class A product. “I noticed at the end of last year some of our [assets] trading at higher than replacement cost,” he said.

When Cogir was raising capital last year for a development deal at approximately $425,000 per unit to build, Leinbach contacted many of those same LP equity sources. Once again, these investors told Leinbach they were passing on the opportunity because they were paying for assets at less than replacement cost. He informed them, “No, you’re paying more than replacement cost because you just bought this building at a higher number.”

“The argument that you can buy at less than replacement cost for Class A [properties] is finished,” said Leinbach.

Sometimes it takes creativity to obtain capital for ground-up projects. One development deal that Cogir did get capitalized last summer was through a high-net-worth retail broker-dealer. “Otherwise, it wouldn’t have gotten done,” said Leinbach.

Cogir currently has one community under construction, and it plans to break ground on two more in the second quarter of this year. Leinbach expects to see many more groundbreakings by Cogir in 2027.

‘Exotic Capital’ is in Demand

Mullin of Flatiron Development Group, headquartered in West Linn, Oregon, said his firm has been spending its time during the development slowdown searching for what he calls “exotic capital.”

“We’re using HUD financing right now, which is very time consuming,” he added. The advantage for Flatiron of securing HUD debt financing to build is the attractive price — a 4.5 percent interest rate in one case. Interest rates for HUD’s primary seniors housing construction program, the Section 232 program, are currently ranging between 5.35 percent and 6.01 percent, plus an annual mortgage insurance premium (MIP). 

The key is to have very good capital partners and be creative, advised Mullin. “CBRE was our partner with the HUD money that we found. We started with CBRE by looking at just traditional sources of capital. Aron Will (vice chairman at CBRE Capital Markets) was about to find me some traditional capital when everything turned off two or three years ago, and we pivoted to HUD. It’s working out very well.”

Meanwhile, the cost of construction remains quite high but has plateaued, noted Mullin. “It’s starting to soften up a little bit with lumber and concrete, but it’s still very expensive.”

Bond Financing Fills Void

When traditional sources of capital dry up for ground-up development, bond financing is another option.  Momentum Senior Living, an operator based in Irvine, California, is involved in a major seniors housing project in Irvine called The James, which secured $473 million in bond financing in late 2024. ​

More specifically, JLL’s Capital Markets group and HJ Sims arranged $473 million in tax-exempt and taxable bond financing for the ground-up development of The James, a luxury rental, 350-bed seniors housing community. The transaction was the largest tax-exempt senior living financing of 2024 and the largest nonprofit, single-site senior living bond issue to date, according to JLL.

JLL’s Seniors Housing Capital Markets team worked on behalf of Harbert South Bay Partners, LAMB Properties, P3 Foundation and Momentum Senior Living to secure the 35-year financing, with HJ Sims hired as sole underwriter of the bonds.

A groundbreaking ceremony for The James — the first new senior living community in the Irvine market in 28 years — took place in early 2025 and the target date for completion is June 2027. The community, to be managed by Momentum Senior Living, will offer 210 independent living units, 110 assisted living units and 30 memory care units with a mix of luxury studio, one- and two-bedroom residences, averaging 837 square feet.

Due to the high cost of the development —more than $1 million a unit — it was difficult to get capital sources interested in the project, said Johnson of Momentum Senior Living during the panel discussion. In the end, going the bond financing route worked out well for the project team. “It was a very interesting process that I had not been through before.” 

The deal was also an education process for the bond financing community, he noted. “They were very comfortable with continuing care retirement community financing, but not as much on a month-to-month [rental property],” said Johnson. Bond financing, particularly tax-exempt municipal bonds, is widely used to fund the construction and expansion of CCRCs.

According to a case study by HJ Sims regarding the financing for The James, the structure for this rental senior living project was considered innovative and required educating bond investors and other stakeholders.

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