2018 U.S. Seniors Housing Development Costs Report

December 2018

U.S. SENIORS HOUSING DEVELOPMENT COSTS REPORT

In This Issue:

•ExecutiveSummary..................................................................................................2

•Introduction............................................................................................................3

•SiteAcquisitionCosts.............................................................................................4

•HardCosts...............................................................................................................5

•SoftCosts.................................................................................................................5

•FF&ECosts...............................................................................................................6

•ReturnsonCost........................................................................................................7

•DevelopmentActivity&2019CostsForecast...........................................................8

U.S. SENIORS HOUSING DEVELOPMENT COSTS REPORT December 2018

• Totalcostforaseniorshousingdevelopmentin

2018increasedby5.3%year-over-yeartoan

averageof$298persq.ft.or$270,200perunit.

• Hardcostsrepresentedthelargestportionoftotal

developmentcostat66.6%,followedbysoftcosts

at19.7%andsiteacquisitioncostsat10.1%.

• Thehighestcostincreasewasforsiteacquisition,

whichrose16.2%onaveragepersquarefoot.

Hardcostsrose7.1%andFF&Ecosts(furniture,

fixtures&equipment)climbed7.9%.

• Returnsoncostgenerallyrangedfrom7.7%to

9.9%in2018.Whiletheaverageof8.9%was

unchangedfrom2017,achievingthesereturns

isbecomingmorechallenging.

• Seniorshousingdevelopmentprojectsin2018

werelargerinsizethanayearago.Theaverage

unitcountwas128,up5%.Totalgrossbuilding

areaincreasedby4%.

Executive Summary• Buildingdesignscontinuetoincorporatemore

lifestyleoptions,withthepercentageof

independentlivingunitsupby17%.The

percentageofnetrentableareaincreased

slightly,indicatingdevelopersarebuilding

largerunitsorreducingtheamountofcommon

areatohelpoffsetcosts.

• Constructionstartshavebeendecliningsince

the2016peakandareattheirlowestlevelsince

2014.TheNationalInvestmentCenterforthe

SeniorsHousing&CareIndustry(NIC)reported

Q3rolling12-monthstartsat28,013units,

down14%fromthe12monthstrailingQ32017.

• Risingconstructioncostscoupledwith

developers’focusonmaintainingcurrentyields

areexpectedtokeepconstructionstartsatmore

moderatelevels.

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December 2018U.S. SENIORS HOUSING DEVELOPMENT COSTS REPORT

Figure 2: Development Cost Breakout (%)

Source: CBRE Valuation & Advisory Services and CBRE Research, Q4 2018.

Developmentcostmetricsarevitallyimportantforpartiesinvolvedinthedevelopmentprocess,forconstruction

lendersandforbuyersandsellersofseniorshousingassets.Costsdeterminereplacementvalueandprovide

intelligenceforinvestmentdecisions.Thisreportisprimarilyfocusedonmeasuringtheannualchangein

seniorshousingdevelopmentcostsandtheirimpactondevelopers’returnoncosts.

CBREValuation&AdvisoryServices’SeniorsHousingPracticecompletedvaluationsofmorethan2,000seniors

housingpropertiesacrosstheU.S.in2018.Thedataandanalysisinthisreportwerederivedfromthevaluations

of330seniorshousingdevelopmentsthatwerescheduledfordeliveryin2018and2019.

Introduction

CHARACTERISTICS SUMMARY

Cost ($) Average Year-over-Year Change (%) First Quartile Median Third Quartile

Total 35,750,000 23,200,000 30,975,000 43,525,000Per Revenue Unit 270,200 5.5 227,200 261,500 316,000

Per Sq. Ft. 298 5.3 226 298 346

Property Characteristics Average

Year of Construction 2018-2019

Total Revenue Units 128

Independent Living 41

Assisted Living 50

Memory Care 37

Site Area (Acres) 7.74

Gross Building Area (Sq. Ft.) 129,000

Net Rentable Area (Sq. Ft.) 75,100

Figure 1: Seniors Housing Development Costs Summary

Source: CBRE Valuation & Advisory Services and CBRE Research, Q4 2018. Note: The first quartile is the median of the values below the complete set median; the third quartile is the median of the values which are greater than the complete set median. % change reflects variation from 2017 data.

Totalcostforaseniorshousingdevelopmentin2018

increasedby5.3%year-over-yeartoanaverageof$298

persq.ft.or$270,200perunit.Hardcosts

representedthelargestportionoftotaldevelopment

costat66.6%,followedbysoftcostsat19.7%andsite

costsat10.1%.

Returnsoncost,whenmeasuredasstabilizednet

operatingincomeasapercentageofoverall

developmentcosts,generallyrangedfrom7.7%to

9.9%in2018.Theaverageof8.9%wasunchanged

from2017.

Thepropertiesinthedatasetincludeeitherstand-

aloneoracombinationofindependentliving,

assistedlivingandmemorycarecommunities.

10.1

66.6

19.7

3.6Site

Hard

Soft

FF&E

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December 2018U.S. SENIORS HOUSING DEVELOPMENT COSTS REPORT

Siteacquisitioncostsforfullypermittedlandrepresentasignificantcomponentoftotaldevelopmentcost—an

averageof$32.25persq.ft.ofthegrossbuildingarea.Sitecostsrangefrom$16,900to$33,100perrevenueunitfor

anaverageof$28,100.

Whiletheaveragelandcostincreasedby15.2%perrevenueunitand16.2%persq.ft.ofgrossbuildingareathis

year,itspercentageoftotalconstructioncostroseto10.1%from9.5%.

Siteacquisitioncostsrangesignificantlybasedonmetropolitanmarketandtheproject’slocationwithinthemetro

area,density,regulatoryclimateanddemographictrends.

AnexampleatthelowerendoftherangeisSyracuse,N.Y.withlandcostaccountingfor6%oftotalconstruction

cost($10,000perunit),whileahigh-endexampleisSouthernCaliforniawithlandcostaccountingfor18%of

totalconstructioncost($50,000perunit).

Site Acquisition Costs

Figure 3: Site Acquisition Costs

Source: CBRE Valuation & Advisory Services and CBRE Research, Q4 2018.

Note: The first quartile is the median of the values below the complete set median; the third quartile is the median of the values which are greater than the complete set median. % change reflects variation from 2017 data.

Site Acquisition Costs Average Year-over-Year Change (%) First Quartile Median Third Quartile

Site Area (Acres) 7.74 23.9 4.90 6.23 7.86

Nominal Site Cost ($) 3,575,000 23.3 1,775,000 2,550,000 4,025,000

Cost Per ($)

Site Area Sq. Ft. 18.30 17.3 5.50 10.00 15.00

Revenue Unit 28,100 15.2 16,900 23,500 33,100

Gross Building Area (Sq. Ft.) 32.25 16.2 18.50 24.25 41.00

% of Total Development Cost 10.1 6.3 6.6 9.5 11.5

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December 2018U.S. SENIORS HOUSING DEVELOPMENT COSTS REPORT

Averagehardcostspersq.ft.ofgrossbuildingareaincreased7.1%onayear-over-yearbasisto$197persq.ft.

Hardcostsrangedfrom$154to$220persq.ft.ofgrossbuildingareaand63%to72%oftotaldevelopmentcost.

Hardcostsrepresentthelargestcomponentofthedevelopmentexpenditure.Theyincludesitework,foundation,

buildingshellconstruction,roofing,interiorfinishes,landscaping,signageandlabor.

Theprimaryvariationinthiscostcategoryisattributabletosub-assetclass,amenitiesofferedandfinish,

buildingqualityandmaterials.

Laborisanotherfactorinhardcostsvariation—bothitsavailabilityandwhetheritisunionized.

Softcostsaveraged$59persq.ft.ofgrossbuildingarea,representinganaverage19.7%oftotaldevelopmentcost.

Thiswastheonlycomponentofdevelopmentcoststodecrease,downyear-over-yearto19.7%from21.5%.Softcosts

generallycovertheunseenportionofcosts,suchasinspectionfees,constructionloan-relatedcosts,architectural

anddesigncosts,projectmanagementandanyothercarrycostduringtheconstructionphasesandlease-up.

Hard Costs

Soft Costs

Figure 4: Hard Costs

Figure 5: Soft Costs

Source: CBRE Valuation & Advisory Services and CBRE Research, Q4 2018.

Note: The first quartile is the median of the values below the complete set median; the third quartile is the median of the values which are greater than the complete set median. % change reflects variation from 2017 data.

Source: CBRE Valuation & Advisory Services and CBRE Research, Q4 2018. Note: The first quartile is the median of the values below the complete set median; the third quartile is the median of the values which are greater than the complete set median. % change reflects variation from 2017 data.

Hard Costs Average Year-over-Year Change (%) First Quartile Median Third Quartile

Nominal Hard Cost ($) 24,025,000 16.5 15,000,000 20,575,000 30,250,000

Cost Per ($)

Revenue Unit 179,800 6.9 149,900 172,700 204,100

Gross Building Area (Sq. Ft.) 197.00 7.1 153.50 191.50 220.00

% of Total Development Cost 66.6 1.5 62.7 67.5 71.6

Soft Costs Average Year-over-Year Change (%) First Quartile Median Third Quartile

Nominal Soft Cost ($) 6,975,000 3.0 4,225,000 6,375,000 7,225,000

Cost Per ($)

Revenue Unit 53,300 -2.9 37,500 53,500 66,100

Gross Building Area (Sq. Ft.) 59.00 -4.1 41.75 52.00 72.75

% of Total Development Cost 19.7 -8.4 15.8 19.9 22.3

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December 2018U.S. SENIORS HOUSING DEVELOPMENT COSTS REPORT

Figure 6: FF&E Costs

Source: CBRE Valuation & Advisory Services and CBRE Research, Q4 2018.

Note: The first quartile is the median of the values below the complete set median; the third quartile is the median of the values which are greater than the complete set median. % change reflects variation from 2017 data.

Furniture,fixtures&equipment(FF&E)costsrepresentedanaverageof3.6%ofthetotaldevelopmentcostand

$9,000perrevenueunit,upby4.7%year-over-year.

FF&Ecostsgenerallycoveritemsthatcanbemovedandhavenopermanentconnectiontothestructureof

thebuilding.

Thiscostcanbeconsiderableforseniorshousingdevelopmentduetothesignificantamountofamenityspace

andsupportareas,suchascommerciallaundryandkitchenfacilities.

FF&E Costs

FF&E Costs Average Year-over-Year Change (%) First Quartile Median Third Quartile

Nominal FF&E Cost ($) 1,150,000 7.0 750,000 975,000 1,475,000

Cost Per ($)

Revenue Unit 9,000 4.7 7,000 9,800 11,900

Gross Building Area (Sq. Ft.) 10.25 7.9 7.25 10.50 13.50

% of Total Development Cost 3.6 5.9 2.9 3.7 4.4

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December 2018U.S. SENIORS HOUSING DEVELOPMENT COSTS REPORT

Figure 7: Returns on Cost

Source: CBRE Valuation & Advisory Services and CBRE Research, Q4 2018. Note: The first quartile is the median of the values below the complete set median; the third quartile is the median of the values which are greater than the complete set median. % change reflects variation from 2017 data.

Returnsoncostgenerallyrangedfrom7.7%to9.9%withnoidentifiablegeographic,cost(buildingquality)or

care-levelpattern.Theaveragereturnoncostremainedunchangedonayear-over-yearbasisat8.9%.

Thismetricisdeal-specificandisdeterminedprincipallybysupply-and-demandfactorsintheprimarymarket

areaofeachdevelopment.

ReturnoncoststatisticsfromCBRE’saggregatedatasetaremeasuredasstabilizednetoperatingincomeasa

percentageoftotaldevelopmentcosts.Thestabilizedvaluemetricsarebasedontheoperator’sstabilized

proforma.Theconstructioncostsincludeoperatingshortfallsduringlease-up.Thestabilizedcapitalizationrates

usedarefromCBRE’s2018U.S.SeniorsHousing&CareInvestorsSurveyandTrends.

Returns on Cost

Return on Cost Average Year-over-Year Change (%) First Quartile Median Third Quartile

Stabilized Value ($) 47,700,000 19.8 29,775,000 40,925,000 59,575,000

Per Revenue Unit ($) 366,000 6.8 302,900 365,900 414,600

Stabilized Capitalization Rate (%) 6.6 0.0 6.5 6.5 6.8

Lease Up Period (Months) 22 14.3 18 24 24

Returns on Cost (NOI/Cost) (%) 8.9 0.0 7.7 8.5 9.9

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December 2018U.S. SENIORS HOUSING DEVELOPMENT COSTS REPORT

Development Activity & 2019 Costs ForecastTwogovernmentstatisticsportrayarisingcost

environment.Theconstructionindustryinputsof

theProducerPriceIndexwereup6.6%year-over-year

inOctober(theinputsrepresentallthegoodsand

servicesusedinconstruction).TheU.S.Bureauof

LaborStatisticsalsoreporteda3.9%year-over-year

increaseinweeklyhourlyearningsforall

constructionworkersinOctober.

Constructioncostsarerisinginallcommercialreal

estatesectorsduetoincreasedland,laborand

materialscosts.Forconventionalmultifamilyassets

(mid-rise:fourtosevenstories),FannieMaereports

thattheaverageconstructioncost(excludingland)

roseby6.3%to$211persq.ft.thisyearfrom$199

persq.ft.in2017.

Atotalof55,462unitsin498seniorshousing

developmentprojectsacrosstheU.S.wereunder

constructionasofQ32018,accordingtotheNational

InvestmentCenterfortheSeniorsHousing&Care

Industry(NIC).Thetotalexcludesmajoritynursing

careprojects.

Constructionstartshavebeendecliningsincethe

2016peakandareattheirlowestlevelsince2014.

NICreportedQ3rolling12-monthstartsat28,013

units,down14%fromtheyearendingQ32017.

Continuedmoderationindevelopmentactivityis

healthyfortheseniorshousingmarketbecause

demandhasnotkeptpacewithnewsupply,resulting

indipsinoccupancyaswellassloweryear-over-year

rentgrowth.

Yet,evenwithlowerlevelsofseniorshousing

constructiondevelopmentandlesscompetitionfor

sites,laborandmaterials,developmentcostslikely

willrisein2019.

Laborandmaterialswillremainthechiefdriversof

highercosts.Whileseniorshousingdevelopmentis

slowing,thesectorcompeteswithothertypesof

construction—particularlymultifamily,whichis

expectedtoremainatahighlevelin2019.Therefore,

thepressureonlaborcostsshouldremain.Materials

costswillalsocontinuetoclimb,especiallyiftrade

tariffsremain.

CBREexpectsseniorshousingdevelopmentcoststo

risemodestlyin2019,astheydidthisyear.

Risingconstructioncosts,coupledwithdevelopers’

focusonmaintainingcurrentyields,areexpectedto

keepconstructionstartsatmoderatelevels.

December 2018U.S. SENIORS HOUSING DEVELOPMENT COSTS REPORT

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

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AdditionalU.S.researchfromCBREcanbefoundhere.

SpencerG.Levy Chairman of Americas Research and Senior Economic Advisor +16179125236spencer.levy@cbre.comFollowSpenceronTwitter:@SpencerGLevy

JamesA.Graber,MAI Managing Director Seniors Housing &Healthcare | Practice Leader +13477220225james.graber@cbre.com

DanielLincoln,MAIDirector Seniors Housing & Healthcare +12055825733daniel.lincoln@cbre.com

CBREValuation&AdvisoryServices’seniorshousing&carespecialtypracticeisdedicatedtoassistingourclientstobetterunderstandthedynamicsofathrivingseniorshousingandhealthcaremarket.CBREofferscorporate-wideaccesstothemostadvancedinformationsystemsandanalyticaltoolsintherealestateindustry.Thisallowsforaccurateandreliablevaluationsthatarecriticaltothehealthofeveryrealestateinvestmentandloan.

Contactourteamtoarrangeacustomizedpresentationoftheseresultsorformoredetailedinformationonaspecificmarketorpropertytype.

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JeanetteI.RiceCRE®Americas Head of Multifamily Research +12149796169jeanette.rice@cbre.comFollowJeanetteonTwitter:@RiceJeanette