Senior Housing’s Supply-Demand Question
The sector is making a comeback, but the market dynamic remains complex. Experts weigh in on what's ahead.
Senior housing continues to bounce back from the pandemic, with occupancy now approaching the peak levels registered in 2020. Occupancy hit 86.5 percent in the third quarter of 2024, according to an analysis by the National Investment Center for Seniors Housing & Care, marking the 13th consecutive quarterly increase.
Yet there appears to be a supply-demand disconnect on the horizon. Construction is at historic lows, with just 7,100 units breaking ground through September, and the third quarter posting the fewest units under construction since 2014. All told, supply increased just 1.1 percent year-over-year. While the industry’s rebound is solid, these trends point to a major challenge ahead if development doesn’t pick up.
A growing, diversified need
By 2030, all 73 million Baby Boomers will have turned 65. By 2040, the number of people age 85 and older will have doubled in less than two decades. These figures shout high demand, but with a twist.
That demand grows ever more nuanced, thanks to the advances in health care and technology. Traditional retirement is often obsolete, as seniors live and stay active for longer, making it more challenging than in the past for the industry to anticipate demand.
Some people will move to a senior living community later in life than before. Those who choose to spend their retirement years in senior housing will likely need to plan for longer retirement, or even several stages of retirement, creating demand for multiple senior living categories. These factors point to the need for a delicate balance, as excess supply could dampen growth but scarcity would damage fundamentals.
“Except for the active adult rental market, for the most part, senior housing communities cater to older adults who are 80-plus,” said Lisa McCracken, head of research and analytics at NIC. “That isn’t to say that there aren’t people aged 75-plus or even 65-plus in some communities, but in general, the majority of residents that reside in senior housing communities are 80 and older.”
Senior housing demand up close
Occupancy and the pace of development are similar for both independent living and assisted living. As of the second quarter of 2024, NIC MAP data showed an independent living occupancy rate of 87.6 percent in 31 primary markets, compared to 84.3 percent for assisted living.
“While independent living has a higher national occupancy rate, a trend that has been consistent since coming out of the Great Financial Crisis, the assisted living rate actually rebounded quicker than independent living in terms of recovering to prepandemic levels,” McCracken noted.
The active adult market is growing and has real appeal for the Baby Boomer customer, but it skews to a lower age bracket, with new residents typically in their late 60s to early 70s. Most rental properties have a majority of single residents, but couples comprise as much as 50 percent of residents at some communities, and many residents still work full-time or part-time.
READ ALSO: Senior Housing Occupancy Ticks Up in Q2 2024
In the second quarter, the annual inventory growth rate for assisted living, 1.6 percent, was slightly higher than the rate for independent living, 1.3 percent. Both categories were significantly below their 10-year averages, and current construction starts for both are very low, similar to 2009-2011, McCracken noted.
Another significant factor: NIC projects that the gap in senior housing supply will hit 550,000 units by 2030. “Conversations around development are picking up again, and the next 24 months will be an exciting time, with occupancy rates improving and new developments on the horizon,” predicted Simona Wilson, portfolio manager at Revel Communities.
Move-in age
As the pandemic waned, move-in ages rose, but that was because a large number of seniors held off from moving during the peak of the pandemic. “We are now seeing some signs of that average age plateauing or even coming down,” McCracken said. “Incoming residents are not necessarily entering because of pent-up pandemic demand, but as (new entrants) interested in that particular community at the appropriate stage of their life.”
At Revel, the average age of residents is currently 82. However, they are moving into independent living communities at younger ages. Between 2021 and 2023, Revel observed growth at its communities in the 61-to-80 brackets, while growth in the 81-to-95 cohorts decreased.
“This shift may signal a growing preference for seniors to transition earlier in their retirement to take advantage of the social, wellness and lifestyle benefits that come with independent living,” Wilson suggested. “This could reshape the traditional retirement timeline, with seniors spending more years in independent living environments.”
Independent living: lifestyle choice
While the perception of senior housing has shifted somewhat as Gen X has moved their parents and grandparents into communities—and better understands the model’s value—too much “nursing home” and “where you go to die” stigma still surrounds the sector, observed Nancy Swanger, founding director of the Granger Cobb Institute for Senior Living at Washington State University.
“Boomers are also a bit more receptive to moving into a community, as they went away to college and lived in dormitories, so the idea of living with others is not as intimidating,” she said.
The move-in age at independent living communities has also declined due to a growing acceptance of senior housing, coupled with new supply that better suits the wants and needs of low-acuity seniors, remarked Mike Gordon, Harrison Street’s chief investment officer.
But the lifestyle is the main factor influencing the choice of independent living among seniors, which comes with the security of an environment tailored to their needs, according to Swanger. Household downsizing is another, and socialization is a big motivator, as well.
“Isolation while living alone at home is a real health risk, and we’ve observed significant improvements in residents’ well-being once they move into a community,” Wilson said. “They benefit from daily social interactions and enjoy regular, healthy meals, which is another key factor in their decision.”
Lastly, residents in this segment are looking for an active lifestyle without all the responsibilities of homeownership. “For other segments, people are often moving in later, not necessarily older, but with more frailty and higher acuity,” added Swanger.
Aging in place
Not everyone wants to spend their retirement years in senior living communities. Aging in place is a trend that will continue to unfold and bears close watching for its potential impact on senior housing.
“People may prefer to age in place—don’t want to leave their home, limited financial resources, little appetite for the current product, more services available in home, among other (reasons),” said Swanger. Better tech-enabled platforms support this trend, as well as an array of home care-related options.
One major hurdle to aging in place is the shortage of younger people to care for older people. “Intergenerational living becomes nearly impossible if one family raising their children suddenly must care for four to eight aging parents in one home,” Swanger pointed out.
The finance factor in investment and supply
Many seniors sell their homes to move into a senior community, but high interest rates have impeded home sales over the past few years. However, that may be on the verge of changing.
“The Fed just lowered their target interest rate, so we can expect to see mortgage rates follow, making homeownership more affordable for homebuyers—which benefits seniors who are selling,” said Brent Maier, national real estate advisory leader with Baker Tilly’s development and community practice.
In the wake of the pandemic, some operators were unable to weather decreased move-ins and increased costs. That trend led to mergers and new operators at distressed communities. “While the census is back to prepandemic numbers in some areas, rates are not, thus margins are lower,” Swanger noted, adding that residents don’t want to pay premium rates to live at outdated properties.
High inflation and rising costs didn’t help either, but an increasing number of properties reached operationally stabilized levels. The lending landscape is expected to improve significantly. With both Fannie Mae and Freddie Mac active in 2025 and lenders coming off the sidelines, financing should become competitive again, spurring investment activity in both stabilized and non-stabilized deals, predicted Bryan Lockard, head of health-care and alternative real estate at JLL Value & Risk Advisory.
“With the recent interest rate cut announcement, this signals we’ve hit bottom, and investors have more confidence rate cuts will continue which will enable better decision-making going forward,” Lockard said. “With historically low construction levels and financing becoming more available, new development could become more prevalent in the near term.”
Value-add opportunities will also continue to be attractive as investors seek to avoid the high cost of new development. But Lockard adds a cautionary note about value-adds: “We’ve seen less and less of these, and with property-level operations continuing to improve, this may not be as big an opportunity going forward.”
Inflationary forces, high financing costs and a high bar to accessing credit have produced a slowdown in new supply and expected short-term deliveries. “Interestingly, while COVID-19 and cheap money induced a flurry of new multifamily and industrial development in 2021 and 2022, those same drivers led to a dramatic slowdown in senior housing development during that same period,” Gordon said. And that, he noted, is creating a tremendous tailwind, especially when combined with the robust demand story.
Several more interest rate cuts will be needed to open up the capital markets. That could create room for more development in the second half of 2025, but projects typically have a three-year lead time.
“The peak demand for Boomers in the industry is roughly 2025-2030—still likely to have demand far outpace supply, particularly of the right products,” Swanger predicted.
Seeking hot spots and affordability
Similar to multifamily’s uphill battle, there is currently not enough senior living product to serve the middle market, especially those between the 41st and 80th income percentiles. These residents don’t have enough assets to afford the high-end, private pay models but they have too many assets to qualify for government assistance.
Demographics will continue to support growth, especially for product that meets a lower-middle to middle-income offering, as well as the more recent interest in active adult offerings, according to Jennifer Schwalm, principal with Baker Tilly’s health-care senior services practice.
“Independent living and assisted living—especially with a focus on memory support—have drawn investors because of their ability to scale, generate higher operating margins, and incur less regulatory risks associated with health care,” she said. “The combination provides the consumers with a continuum of service as their health needs change.”
Geographically, high-barrier coastal markets with high-density populations or growing populations are most favorable for senior living investments, according to Lockard, who added that the Sun Belt is also still very attractive. In addition to weather, Baby Boomers also look at such factors as walkability, amenities, opportunities for intergenerational activity and proximity to children and grandchildren.
“A significant portion of our residents move to be closer to their families, and this often means relocating to areas with strong local economies, which include major employers and good school districts,” said Wilson. And that trend plays a critical role in shaping supply, as communities are increasingly developed in metro areas that offer these qualities.
