How Lcs, Sequoia Play Offense And Defense With Senior Living Capex Projects

Investing in CapEx and refreshing older properties has always been part of the senior living real estate cycle. In 2024 as new development remains tough, the practice has taken on a new importance.

How and why senior living operators undertake CapEx projects has shifted in recent years as operators have prioritized meeting the needs and wants of the incoming generation of older adults. In 2024, trends such as wellness and independence have informed the kind of projects these operators undertake.

As ground-up expansion has been hard to eke out, some operators have increased their CapEx budgets as a way to grow and evolve without expanding beyond their existing community footprint.

For operators like Sequoia Living and Life Care Services, the ever-present challenge lies in how to allocate resources for so-called offensive CapEx, such as renovating dining spaces and adding amenities; and defensive CapEx, such as replacing windows with fire resistant options. Operators are also taking into account which renovations have the best return on their investments.

“Do we invest in CapEx projects that will keep our aging portfolio young and fresh and marketable? … How much of that is now going to more defensive things, like disaster mitigation?” Dave Latina, chief business development officer for Sequoia Living, said at the Senior Housing News reBUILD conference in Chicago. “Those are some of the biggest challenges.”

Playing offense vs. defense

San Francisco, California-based Sequoia is currently focusing its CapEx budgets on defensive CapEx, with fire and flood mitigation projects making up around 70% of the company’s total projects. However, that will likely change in the near future as the operator turns its focus to a new generation of incoming residents.

“There’s only so many windows you can replace,” Latina said. “At some point you’ve hardened your buildings and hardened your sites as much as you can living in a wildfire zone.”

Sequoia has 10 years worth of improvement projects that it is spreading across its four life plan communities, he added.

Life Care Services is taking a more balanced approach to CapEx, with roughly an equal split between offensive and defensive projects, according to Nick Herrick, vice president and director of development for Life Care Services.

Offensive projects have included modifying dining venues for residents, such as building bistros and casual dining over more formal settings. The Des Moines, Iowa-based company has at some communities split larger spaces into smaller, more intimate common areas.

“We’re not using that one space – say a multipurpose space auditorium. We’ve broken it into sections so that it can be used for multiple uses instead of just that big auditorium space that sometimes ends up being conference rooms [or] classrooms,” Herrick said.

Both companies are involving current residents in the planning process, whether that is through focus groups or resident design review committees. Latina said finding a balance of both new and old residents is key to remaining competitive and avoiding increasing fees that would affect older residents.

“There’s a lot of pre-work with both the residents and the development teams before we even start the conversation on these, and nobody is ever all happy. It can get pretty ugly, but we just keep moving it forward,” he said.

In an effort to mitigate costs as much as possible, pre-planning, pre-development and competitive bidding have become more important than ever as costs have increased.

Latina added construction fatigue for residents has to be included in the planning stages.

“We often see a lot of operational losses by not really considering what the impact is, or construction fatigue in a concrete tower,” he said. “Instead of starting at 9 a.m. and ending at 3 p.m., you’ve now got to condense those hours.”

Budgeting and ROI

LCS budgets for CapEx projects based on the community and its needs. In 2024, CapEx amounts ranged from $5 million up to $250 million, Herrick said.

In order to keep costs stable LCS has established a process over the past 52 years where stop points are put in place for every project that acts as additional risk mitigation in order to be able to stop and price the design at certain stages to update performers.

Sequoia has three campuses that are between 50 and 60 years old, and one campus that is only around two years old. The older campuses usually have a CapEx budget of around $10 million per year, and Latina said it increased to around $50 million for all three this year as part of the disaster mitigation efforts.

Finding the return on investment for the amount put into these projects is also entirely dependent on what is being replaced. Latina said replacing outdated cogeneration systems being replaced with hydrogen fuel cell technology has a pretty rapid ROI that is estimated to earn its cost back in no more than five years in energy efficiency savings. On the other hand, however, there won’t be any kind of return for replacing existing windows with heat resistant tempered glass to “prevent fireballs from penetrating the building and igniting it.”

Other returns don’t have a direct impact that can be measured. For Herrick, that can take the form of remaining relevant in the marketplace.

“It’s a fine balance … But there are some things that just don’t have an ROI on it,” Herrick said. “There’s a lot of non revenue generation spaces you have to keep up to stay relevant in the marketplace with that as well.”

Latina added that while bringing older projects up to date can have a negative impact on key performance indicators, particularly on compliance projects that don’t generate revenue, it can be made up for in resident satisfaction surveys improving, which leads to rooms being absorbed on a faster turnaround.

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