An unprecedented run of more than a decade of low interest rates has benefited some of the most successful value-add multifamily investors. Sale prices surged during the pandemic, helping many of these assets reach or exceed their investment objectives, but the supply of new deals with similar upside potential has dwindled significantly.
Now, as investors contemplate an uncertain economy and future in the conventional multifamily rental market, the Active Adult sector has been generating significant buzz due to a variety of economic, demographic, and social factors.
Active Adult communities serve adults aged 55 and older and provide more social activities than conventional multifamily at a more affordable price point than Independent Living. They attract residents that want tailored, age-restricted housing without the additional costs of food & beverage service and nursing services, which results in a lower monthly rent expense (typically a 40-50 percent discount to IL rents due to simpler operations and no food service). A typical Active Adult property has six to seven employees vs. 20-plus employees for an IL facility housing the same number of residents.
According to the latest U.S. Census figures, the number of 65+ households is expected to grow by more than 16 million by the end of the decade, and by 30 million by 2060, when this demographic is projected to represent nearly a quarter of the population. These staggering numbers indicate demand for adult living investment will continue to rise despite variances of rents or geographic location.
The obvious demand from this expanding segment of the population has whet investor appetite for the sector. New development activity, however, has fallen far short of the need. Even if new construction starts exceeded historic levels by more than 50 percent, demand is expected to be three times more than supply over the next five years. This presents a unique opportunity for qualified value-add multifamily investors and operators to acquire, renovate, and/or develop Active Adult communities.
A Stickier Tenant Base
In addition to the supply and demand incentives, our research over the past several years reveals significant operational and cash-flow rationales for why the sector is attractive, including historically low turnover rates of approximately 25 percent (compared to as high as 50 percent on a national average for multifamily). Also, Active Adult properties have durable revenue streams, generating strong, consistent cash flows. Once occupied, residents tend to renew at a very high rate with a five- to seven-year stay, on average.
Active Adult residents generally have cash in bank and are not over-levered, with steady income streams from Social Security. In short, they are a good bet. As the demographic that lives in these properties takes care of their homes, the assets are less labor-intensive and require less maintenance, resulting in higher NOI margins.
The changing nature of Active Adult lifestyles mean that there is significant room to implement value-add improvements in existing communities. The steady income streams and rising demand provides an opportunity to raise rents. In fact, rents at these assets showed growth of as much as 5 percent a year, even during the pandemic.
Collections also proved not to be an issue in this sector during the Covid outbreak, remaining at nearly 100 percent nationwide, compared with 80 percent to 85 percent in the conventional multifamily sector.
The 55+ demographic offers a sticky tenant base, which creates a durable cash flow, strong returns, and value appreciation in highly desirable markets. The ongoing supply/demand imbalance, however, means that there is just not enough Active Adult housing available to meet today’s needs or the dramatic growth in the demographic expected over the next 10 to 20 years, which gives rise to a unique opportunity for investors to enter this robust sector.
Elie Rieder is founder & CEO, Castle Lanterra.