How NCREIF’s Nod Puts Senior Housing on the Map
JLL's Rick Swartz and Jay Wagner on how this multifamily segment is now in the mainstream for a growing number of investors.
The seniors housing sector started out the year on a high note as strengthening market fundamentals pointed to steady growth and recovery. As expected, this trend continues to unfold with deal volumes beginning to ramp up. This is a result of positive rental rate growth and absorption numbers, aided by a significant slowdown in construction starts, which has lured a growing number of investors to the sector. If this trajectory continues as expected, seniors housing sales activity in 2024 will surpass the activity recorded in 2023.
Many of these investors are new to the market or have only dabbled in seniors housing investment in the past and are now looking to increase and/or obtain exposure in the sector due to positive demographic prospects and the attraction of higher yields and potential for growth. In an exciting piece of news for the sector, as of the first quarter of 2024, the National Council of Real Estate Investment Fiduciaries now includes seniors housing as a standalone sector in the NCREIF Property Index.
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This expansion to the NPI means that for the first time seniors housing is no longer a part of the “other” category and will sit alongside the traditional four major categories: office, retail, industrial and apartment. The performance transparency of this new category raises the prominence of seniors housing as an investment class to institutional investors. This heightened profile is already stimulating new capital formation with a number of large investment managers seeking to raise new pools of capital that will target seniors housing. Furthermore, there have already been several recent investments from new investors of capital to the sector, a trend that is expected to continue.
From a pricing standpoint, the market is witnessing greater bidding activity with good lift between bidding rounds–further evidence of the continued strong interest in the asset class. If interest rates are reduced by year-end as the Fed Chairman has indicated, next year will see robust activity for both sellers and buyers. According to JLL’s most recent Seniors Housing and Care Investor Survey and Trends Outlook report, spreads between the 10-year U.S. Treasury and seniors housing cap rates have averaged 462 bps going back to 2008, evidencing the healthy yield premium investments that the sector commands. Sellers will see an opportunity to jump back in the market and trade assets at better pricing than the past several cycles and buyers will be more motivated to act before the tide shifts to strongly favor the seller.
Bright future for seniors housing
The seniors housing and care industry is on a striking path of growth, driven by demographic changes, strategic investment opportunities and a marketplace that continues to adapt post-pandemic. The market is witnessing a conscientious investment community, keen on harnessing the long-term potential this sector promises. Opportunities will continue to exist for investors to acquire high-quality real estate at below replacement cost for the foreseeable future.
As the industry looks ahead, there is a bright future for seniors housing contingent on certain economic conditions. With the expectation that the 75-plus demographic will nearly double by 2045, the demand for seniors housing is set to surge, presenting substantial opportunities for investors with a long-term outlook.
While financial conditions remain challenging for new construction starts in the coming months, demographic patterns show longer term opportunity for continued seniors housing development. That said, with a few exceptions, construction is expected to remain significantly depressed until such time as industry occupancy climbs above 90 percent with additional significant rate growth.
Rick Swartz and Jay Wagner are JLL senior managing directors & Seniors Housing Group leaders. Swartz and Wagner are regular Viewpoint contributors. Read their most recent article.
