What Are The Opportunities In Senior Housing Today?

Recently, there’s been a fair amount of debate about investments in senior housing, and whether this property type should be included in an investor’s real estate portfolio. The questions about senior housing can be answered, but not without a few definitions first:

Age-Restricted and Independent Living: Residents live independently in age-restricted apartments.

Congregate Senior Housing: Residents live in private or semi-private areas, share recreational facilities, meals (one to three per day), and common areas.

Assisted Living: All of the above, but residents need a higher degree of personal care and assistance with daily living.

Skilled Nursing: These facilities are equipped to handle residents with intensive medical care needs that are more akin to hospital standards.

As we all know, the U.S. population is aging and the baby boom is leading the pack, but where is demand currently and where will it be in the future? There are now about 45.5 million Americans who are 60 or older, and this age group is growing at a much faster rate than the population as a whole. As the baby boomers age, the growth rate of the elderly population will accelerate further, so by 2015 it’s estimated that there will be more than 64.5 million people over the age of 60, an increase of 44%.

More specifically, the largest population bulge will be in the 60-69 age group, a segment expected to grow nearly 70% by the year 2015. The 70-79 age group is the next largest, with growth expectations of 15% by 2015. Finally, the over 80 group is expected to grow 30% in the next 15 years. In addition to a simple growth rate, the supply of potential senior housing residents is large due to medical improvements that have increased life expectancy, and a better awareness of health issues.

While there’s no question that there will be plenty of prospective residents for senior housing, how many will make the decision to choose a senior housing facility? There are many factors that influence this choice, and each individual will weigh these factors differently. It should be noted that in many cases there is no choice or a “choice” is a perception versus a reality. Data shows that for those over 85 years old, a higher percentage actually live in senior housing (10.9%) than those who plan to move to senior housing (2.5%).

It’s also interesting to note that lower-income households choose senior housing more than higher-income households. Those with higher incomes can afford in-home assistance and or to hire other services such as transportation more readily than those with lower incomes. In addition, many seniors find that they prefer to be in the company of their peers and are drawn to the community offered in a senior housing environment.

The returns generated by senior housing are attractive to investors. A comparison of median going-in (cash-on-cash) rates of the various senior housing and apartments (using no leverage) found apartments at 8.5%, age-restricted independent at 9%, congregate at 10%, and assisted living at 11%. A property that blends some or all of the above, to transition residents as the need arises, is called continuing care retirement community (CCRC), which is at 10.5%. Note that class A senior housing properties will trade at cap rates below these numbers. Furthermore, in the current environment, the returns would be enhanced by the use of leverage.

Based on our research, we believe that there are many real estate investment opportunities in age-restricted independent living, congregate, and assisted living senior housing. Given the demographics, we also think the current demand will be for age-restricted apartment communities, which will move in the future toward congregate and assisted living housing.

It’s a unique opportunity. As people get older and have increasing health needs, more income will be directed to health expenditures and less toward investment or consumption of other goods. In addition, compared with other property types, senior housing isn’t significantly affected by technology risk and is less volatile overall, marked by high occupancy, solid rent growth (average 4% per year), and relatively low turnover.