How to Diversify Your Portfolio With Senior Housing

With multifamily development slowing, it is the perfect time for developers to invest in other real estate sectors.

Jad BuckmanGrowth in the multifamily housing industry is showing signs of stagnation as the industry faces increased market saturation and competition. The number of projects is expected to level off in early 2018, according to the Freddie Mac Multifamily 2017 Mid-Year Outlook. That outlook also shows that permits and starts were down 14 percent and 10 percent, respectively, over the last two years, while completions are expected to increase.

This means that even though fewer new apartment buildings are being started, an influx of new properties is expected as existing projects are completed. Industry experts expect this to lead to higher vacancy rates, slower absorption of new units and moderated rent growth. With multifamily development slowing, it is the perfect time for developers to invest in other real estate sectors, like senior housing.

Growth in Senior Housing

Unlike multifamily housing, as Baby Boomers retire the senior housing industry is just beginning to grow. In 2016, there were almost 75 million Baby Boomers, according to the Pew Research Center. Approximately 32 million Baby Boomers, or 42 percent of all Boomers, plan to move, according to Metrostudy, and senior housing communities offer the perfect opportunity for them to downsize.

More importantly, national builders haven’t yet flooded this market, allowing investors to be early entrants with nearly unlimited market opportunity, especially if they consider exploring a homebuilding franchise model to ease the barrier to entry and increase speed to market. Metrostudy estimates that the demand for maintenance-free housing is far exceeding supply, and the 55+ housing market has shown year-over-year gains every year since 2012, according to the National Association of Home Builders.

Leverage Development Experience

Multifamily developers have valuable skills and knowledge that can easily translate to other real estate sectors. For many residential projects, land acquisition and development are the most complicated parts of the process. Commercial investors who are already well versed in these areas can quickly transition to new types of development. Investors may even be able to use land they were originally planning for market-rate housing to take advantage of other growing sectors.

Many developers may find building residential properties easier than building apartment buildings. There tend to be more opportunities, down payment requirements for loans are typically lower and there can be fewer regulations to follow in the building process. It can also be less expensive, requiring investors to take on less initial debt. Demand for multifamily housing is highest in high-priced urban areas, and high-end amenities are expected, making apartments increasingly expensive to build. Meanwhile, senior housing communities can be targeted to a wide range of price points.

Building a Successful Community

Experienced hotel and multifamily developers can apply their knowledge to building for senior housing developments with a few specifications. This demographic increasingly focuses on lifestyle. This means features like high ceilings, natural light, outdoor courtyards and sufficient storage space.

In addition, these communities often provide services like lawn care, snow removal and trash pickup. They may also provide amenities like walking trails, clubhouses, fitness facilities and swimming pools, which facilitate the lifestyle the buyer is looking for.

Diversify from Annuity-Style Investments

Residential properties are not annuity-style investments. Once developers have built and sold a senior housing community, they can move on or reinvest any gains to start another community. This allows investors to try a new type of development without having to collect and manage monthly income, freeing up more capital quicker for future development. This type of development also often has a shorter waiting period before the investment is recouped.

Affiliating with a homebuilding franchise provides investors the tools, market knowledge and economies of scale to ease the transition to a new real estate sector. With proven processes for site identification, acquisition, zoning, entitlement and development through to sales, marketing, vertical construction, purchasing, finance, warranty and closeout, a franchise can help reduce risk and increase speed to market. While the multifamily housing industry is still strong, its growth is slowing, making it the perfect time for investors to diversify their portfolios. Senior housing allows developers to use their experience while being an early entrant into a sector that is just beginning its growth.

Jad Buckman is business development manager for Epcon Franchising, a homebuilding franchise specializing in communities for active adults. Since 1986, Epcon has built more than 375 communities in 28 states and was No. 45 on the 2017 Builder Magazine 100 list.

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