The Outsize Demand for Active Adult Communities

Baby boomers view these as a viable alternative to traditional independent living options, writes Ted Flagg of JLL Capital Markets.

Ted Flagg is JLL senior managing director, Healthcare Group leader.

Ted Flagg

Pop quiz: What has all of the momentum of the white-hot multi-housing market today but lower turnover rates and a modest premium on rents? Answer: active adult communities.

Resident demand for active adult communities, which focus on lifestyle preferences rather than health care services, continues to be a rapidly growing niche segment of the residential real estate market and outsized demand is expected over the next 10 years. Institutional investors are increasingly attracted to the rental rate growth as an inflation-hedge and durable earnings streams as demonstrated by the resiliency of active adult throughout the pandemic.

Active adult communities cater to empty nesters and retirees aged 55 and greater by providing a low-maintenance lifestyle within a resort-like setting that is often more affordable than conventional seniors housing alternatives. Typically, the average age in the communities is in the 70s, notwithstanding the 55-pus restriction labeling. Baby boomers view active adult communities as a viable alternative to traditional independent living options, which typically offer a continuum of services better suited for less active seniors who require a more detailed focus on health care, meals and housekeeping.

While amenities vary, they can include a fitness center, walking/jogging trails, parks, a clubhouse, pool, tennis courts and golf. Active adult communities also offer:

Financial flexibilityAfter selling the family home, residents can rent at the communities without the typical homeowner expenses such as property taxes, mortgage interest and maintenance.

Lifestyle-driven experienceThe communities cater to older adults’ desire for a social and healthy lifestyle by providing organized events, fitness and nutrition classes, arts and crafts programs and continuing education courses.

The prime renter age of active adult communities is in the 70s. With the first wave of baby boomers turning 75 this year, the number of 75-plus-year-old seniors is projected to nearly double over the next decade, well positioning this product for strong upside potential.

Deliveries on the Rise

According to JLL Research, deliveries of new active adult communities have been steadily rising with, on average, some 80 percent of all new deliveries absorbed since 2017, creating a healthy supply and demand balance. Despite the effects of the pandemic, more than 8,000 units were delivered in the fourth quarter of 2020, just slightly below the levels seen the same quarter in 2019, while absorption was slightly higher than the previous year.

Occupancy rates remained stable in 2020, due to a number of factors, including affordability and durable tenancy. The average length of stay in active adult communities is four to six years.

Active adult rents remained stable amid the pandemic, even growing 1.2 percent year-over-year in the fourth quarter in 2020, yet still remain much lower than independent living. This is primarily due to the fact that active adult communities provide less health and meal planning services. When compared to multi-housing, active adult rents achieve a 20 percent or higher rent premium over comparable multi-housing product. This can be attributed to the higher level of service and amenities targeting high-end earners in the active adult communities.

This market segment also maintained strong resilience throughout the pandemic. As such, it is emerging as a prime choice for many institutional investors. While transaction volume slowed 33 percent for the broader real estate market, active adult transaction volume reached $1.8 billion in 2020, marginally declining 2 percent from record setting 2019 transaction volume.

Overall, the durable tenancy coupled with the relative affordability has allowed this market sector to outperform peer sectors (multi-housing and independent living). With such strong fundamentals, active adult communities are well positioned to strengthen and expand over the next 10 years.

Ted Flagg is senior managing director, M&A and Corporate Advisory, Healthcare Group Leader, JLL Capital Markets.

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