Senior Housing Ages Gracefully, but Challenges Persist
Even if development remains prohibitive, the sector is still a strong investment prospect, panelists at the latest MHN webinar agreed.
Record-setting demand and absorption coupled with significant growth of the nation’s 65-and-older population have continued to make senior housing a compelling investment endeavor, even if development and operations face some acute bottlenecks.
This was the prevailing sentiment at the March 20 webinar, “Reimagining Senior Housing,” hosted by Multi-Housing News editorial director Suzann Silverman. The discussion featured a panel of some of the sectors’ leading investors, developers and research experts. While senior housing remains a safe bet amid an increasingly uncertain macroeconomic environment, interested investors would do well to understand some of the underlying trends and struggles.
Strong fundamentals, with some weak spots
Most of the senior housing sector’s internal and external fundamentals are strong and point to an asset class that will remain both in high demand and short supply for the foreseeable future. According to data from NIC MAP, the sector’s average occupancy rate of 87.2 percent in the fourth quarter of 2024 has passed pre-pandemic levels, and is expected to break 90 percent by the end of next year.
Absorption has grown for 14 consecutive quarters, surpassing inventory growth every year since 2020. At the same, time the nation’s 80-plus population is projected to surpass a 6 percent annual growth rate in 2027. The baby boom generation has grown at an unprecedented rate, and is expected to reach 61.3 million by 2029, comprising 17 percent of the population.
These fundamentals lend to increasingly healthy investor appetites. Transaction volumes in 2024 had their best year since 2021, clocking in at $15.6 billion in total trades from public, private, institutional and cross-border capital providers.
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Even though these numbers vary from market to market, “they are strong, and there are clearly a lot of tailwinds from the aging demographics,” noted NIC head of research & analytics Lisa McCracken.
But there are some clouds to sunny fundamentals. The 8,800 new units to come online in the fourth quarter of 2024 is up 18 percent in comparison to 2023, but down 23 percent when lined up with 2022’s new deliveries. In McCracken’s opinion, equally concerning as the number of new deliveries is the slowdown in the construction of existing projects.
“Once shovels go into the ground, on average its 29 months until we see residents moving in,” she said.
The chief culprits are construction and capital costs, the former of which is are up 4.7 percent year-over-year, according to ULI. Add to this the current presidential administration’s penchant for tariffs that could impact contracting and material costs, and the number of starts could drop even further than predicted. Most recently, the number of units under construction is down 24 percent year-over-year.
“Demographic growth is quite pronounced at a time where we have very little new construction,” McCracken told panelists and attendees.
Some of these difficulties extend beyond building new communities, but operating existing ones as well. Labor shortages, particularly of nurses and caregivers, “had much more of an impact on our industry than COVID did,” and pose an elevated underwriting risk for new transactions, according to McCracken.
“From an operational standpoint, it’s our biggest risk and will continue to be,” she said. And these shortages can’t be surmounted in the same way that capital conundrums can. “Our business at its core is thousands of transactions each day where one person is laying hands on another, and you can’t replicate people.”
Stakeholders take a step back
In the opinions of other panelists, the construction headwinds will do little to impact the sector’s investment appeal. Why? The demand for senior housing that comes with aging and the difficult conditions of some senior citizens that require full-time care.
“Daily activities, socialization and interacting with your peer group are hard to replicate in your own home environment, and if you live to the age of 85, you have a 50 percent change of being diagnosed with some form of dementia,” Charlie Jennings, chief development officer, Harbor Retirement Associates said.
Certain life choices made by the baby boomers make some form of assisted living a near necessity. For instance, the divorce rate among baby boomers is triple that of previous generations, effectively eliminating spousal caregiving for this segment of the population.
Investors are well-aware of these trends, too. REITs and private equity remain active in the space, while debt funds are dipping their feet back in the water as interest rates drop. Private investors accounted for the largest portion of transactions in 2024.
“It’s been interesting to watch how debt funds have opened up the landscape, as well as people getting used to higher costs of capital,” said Jesse Marinko, CEO of Phoenix Senior Living.
Further assisting in the capital raising process is the fact that senior living is now being classified as its own category within the National Council of Real Estate Investment Fiduciaries’ Property Index. Such a change is owed in no small part to the sector’s strong performance and fundamentals, according to McCracken.
“We are now a separate standalone category, and that helps justify some of these investments,” she said.
But with this elevated investor interest comes a need for owners and operators to filter out the better-fitting partnerships. One can’t go wrong with an institutional investor partner; “they’re patient, they’ve made a big push into our space leading up to the pandemic and they have traditionally been our best partners,” Jennings said.
It’s not that a partnership with a less senior-housing-exposed firm won’t work out, but the amount of planning that goes into a development or investment far eclipses that of traditional multifamily. As such, any interest investor needs to do their homework.
“They’re a restaurant, home care and hotel all in one,” Marinko said. “If you are not a senior housing person, we need a good narrative behind that.”
For Jennifer McGurty, AEW Capital Management’s head of senior living, it’s a matter of “taking lease-up risk as opposed to development risk” for a new capital injection. Unless there are changes from a policy standpoint, it’s tough to make the case for development, she advised.
A time for introspection
For any development breaking ground now, and for the foreseeable future, maximizing rents is the name of the game.
“As we watch pricing jump, efficiency becomes a number that you stare at: one of revenue generating versus non-revenue generating square footage,” Marinko detailed. “That gym and yoga studio can be one room, and the library and art studio can be two rooms.”
This idea can also be applied to existing properties. Marinko anticipates seeing redevelopments of both existing multifamily and traditional senior housing into independent or assisted living as “huge pockets of opportunity.”
In the end, McCracken sees the development slowdown as a blessing in disguise: “It’s allowed us to sit back and ask what we have learned, as well as what we need to do differently.”
