AN ECONOMIC OVERVIEW OF SENIOR LIVING DEVELOPMENT FOR INVESTORS

How U.S. senior care has evolved

Before the 19th century, senior living communities in the U.S. did not exist, with many elderly cared for by family or placed in shelters for the poor. Often, the elderly were placed in “almshouses” or “poorhouses,” a concept brought to the U.S. by English settlers. These homes fell well short of providing quality care for aging workers who were no longer able to earn a wage. As the issue became more prevalent, the U.S. Social Security program was established in 1935, designed to pay retired workers aged 65 and older a continuing pension income after retirement.

 

The Growing Housing Needs of Seniors

With advances in medicine, more active lifestyles, and better eating habits, today’s seniors are living much longer. In 1940, individuals surviving to age 65 had an average remaining life expectancy of 12.7 years. Today, individuals turning 65 are expected to live another 18.7 years on average. About one out of every four 65-year-olds will live to be 90 years old, with one out of every 10 expected to live past 95 years.

A major benefit for investors in the senior housing space is the resiliency of this sector of the commercial market. A key component of the senior housing market’s success is its lack of reliance on an economic or real estate environment. Senior housing has been the top-performing commercial real estate sector for the last ten years. This includes the period encompassing the 2007 capital market collapse, in which returns among other commercial sectors fell as much as 20%.

Senior housing has increasingly drawn the attention of investors for many reasons.  Among them are the sector’s strong investment performance returns.

A major benefit for investors in the senior housing space is the resiliency of this sector of the commercial market. A key component of the senior housing market’s success is its lack of reliance on an economic or real estate environment. Senior housing has been the top-performing commercial real estate sector for the last ten years. This includes the period encompassing the 2007 capital market collapse, in which returns among other commercial sectors fell as much as 20%.

The Seniors housing sector has also proven to be recession-resilient as occupancy rates fell and rent growth remained positive throughout the most recent downturn. In contrast, occupancy rates declined approximately 450 basis points to just below 87% during the great recession. The seniors housing sector continues its recovery from the impacts of COVID-19, with investors expecting rental rates and residency levels to rise further in 2022.

Most investors (82 percent) expect senior housing communities to reach pre-pandemic resident levels within 18 months, with the quickest absorption pace in the lower-acuity communities such as active adult and independent living. For higher acuity communities, such as assisted living and memory care, the reabsorption period extends to 24 months for most investors (89 percent).

For an active adult, independent living, and memory care assets, more than 70 percent of investors expect rental rate increases of 1 to 7 percent in 2022, with 42 percent expecting an increase of 3 to 7 percent. For the skilled nursing and continuing care retirement community subsectors, 68 percent of investors expect rental rate increases of 1 to 3 percent this year.

The increase in senior housing occupancy despite the highly contagious Omicron variant is a testament to the success of the COVID-19 vaccines and to the infection control policies operators put in place to keep residents safe.

Not all senior housing types are faring the same. Occupancy at assisted living properties increased while independent living occupancy ticked down, likely because assisted living is more needs-based and demand is rising more quickly. Assisted living occupancy is now at 77.9%, up from its pandemic low of 74.2% but still below pre-COVID levels of 84.6%.  Meanwhile, independent living occupancy stands at 83.1%, up 1.4 percentage points from a pandemic low of 81.7% and below a pre-pandemic 89.7%.

 

 

The Economics of Senior Living Development

There are basic economic factors that influence the profitability of an investment, and they are:

Experienced Operator

Market demographics are just one set of factors that impact a senior’s housing investment. An important factor is an operator managing the senior housing community in which you invest. Operators are charged with managing the day-to-day business within the care community and play a significant role in determining the success of any given investment. As such, they need to be chosen more carefully than many investors realize.

Senior housing is an incredibly specific sector of commercial real estate. Finding experienced operators who understand the nuances of the industry can be difficult. As such, many will select an investment based on factors such as the quality of a building, the slickness of marketing materials, the experience of the chosen executive director, or market demographics, rather than the operator named in the deal. In order for a senior housing project to reach its full potential, it must have an operator lined up who has a detailed understanding of local regulations, and how to operate and manage a senior housing business.

 

Demand Composition

The demand dynamics behind the all-around senior housing options are fundamental. It often begins with the lifestyle decisions made around retirement and adjusts through the aging process as the need for assistance increases over time. In addition to the lifestyle choice, the ability to stay at home versus move is partially dictated by financial standing but is also dependent on the availability of one or more family members to provide assistance. Family dynamics have been shifting gradually over the past decades influencing the availability of the senior adult’s children to provide ongoing direct support at home. The demand for senior housing involves those aged 45 to 64 and 65 and above.

 

Sources of Rental Payments

Multiple resources are available to help pay the monthly rent and service fees associated with senior housing. The primary financial resource is the income of the seniors themselves. The monthly rental payments can exceed well over $10,000 depending on the nature of the senior housing complex. This is particularly true as you move up the array to memory care and skilled nursing facilities.

This implies that additional resources necessary to cover the average expenses at a senior housing community are near $20,000 annually. Money from savings accounts, stocks, bonds, retirement accounts, the sale of real estate assets, vehicles, and more may be contributed. Also, long-term insurance policies and financial support from their children are sources of rental payments for the senior housing occupants.

 

 

Demographic & Market Selection

The more relevant demographic analysis for senior housing focuses on the surrounding trade area. For a typical suburban-located community, the primary trade area tends to extend between five and ten miles from the property.

Some of the more important trade area characteristics utilized to determine the relative depth  within that trade area are:

• Number and growth of seniors
• Number of seniors above a certain income point
• Number and growth of adult children households above a certain income threshold typically (such as $100,000 or $150,000) 
• Housing values
• Competitive landscape (number, type, age, quality)
• Trade area performance (occupancy, rents)

 

Market Competition

Most seniors don’t want to have to move a hundred miles away from their families or communities. As such a number of questions regarding the market competition are considered and they are; What type of care/facilities are offered? Are there gaps in what exists today? What are the comparable market rents at other local facilities? What are competitors’ occupancy ranges? How many units or beds does each location have? Getting answers to these questions provides a better understanding and insight into the market competition.

 

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.