Long considered a niche real estate investment, the need for senior housing is stronger than ever. The Baby Boomers, which have had an outsized presence both by numbers and economic might compared to previous generations, are now comfortably within their golden years, the youngest being 58 and the oldest being 76 years old. Because of the sheer numbers of America’s aging population, senior housing could be an attractive real estate investment, with many going as far as to call it “recession-proof.” But while there’s an urgent need to build more senior housing developments, senior housing has been an intimidating asset class for a lot of investors.
Shifting demographics in the U.S. have positioned the senior housing sector for rapid growth over the next decade, but “senior housing” is more of an umbrella term that embodies multiple development types. There are independent living facilities, which are designed for seniors who want to maintain the advantages of living in a community without sacrificing their freedom. There are also age-restricted communities (where all residents are age 55 and older). Some senior living accommodations include some form of service, including residential care homes for tenants who need a little help with everyday tasks but don’t require round-the-clock care. Assisted living facilities keep tenants in small apartments attached to communal areas (like dining halls) and have staff available 24 hours a day to care for tenants. Then there are nursing homes that offer more specialized care for elderly adults who can’t take care of themselves due to debilitating mental or physical illnesses.
For people who fit the definition of a senior citizen, which at this point is every member of the Baby Boomer generation, there is a wide range of developments available to fit their unique lifestyle demands. Granted, it’s not just Baby Boomers who are responsible for the time-bomb ticking down to the sector’s explosion. The number of Americans 65 and older, also known as the “silver tsunami,” is expected to reach 72 million by 2030 and 83 million by 2050. This important demographic trend puts a lot more pressure on a system that already faces a senior housing deficit. For multifamily landlords, this kind of widening gap in the market is creating a huge opportunity for investment. After all, maintaining families and communities has a beneficial social impact, which is a compelling argument in and of itself for investing in this asset class. However, the wide array of development types indicates that senior living properties pose distinct challenges when it comes to managing them.
One of the reasons why senior housing has become more complicated as a sector is because of the tenants themselves. Humans are generally living longer, which means that seniors will be in the elderly stage of their lives longer than past generations. The life expectancy for 65-year-olds has steadily increased since the 1960s. Today, the average 65-year-old woman can anticipate living to 86 years old, whereas the average 65-year-old man can anticipate living to 83. Data from the CDC shows that as of 2019, a 65-year-old woman lived an additional 20.8 years on average and a 65-year-old man lived an additional 18.2 years.
Now, the increase in lifespan is adjusting metrics for senior housing developments in more ways than you would think. It’s not only extending senior housing stays, it’s also paradoxically delaying when senior citizens transition into senior housing, if they choose to do so at all. A 2021 study from AARP discovered that a growing number of senior citizens are remaining in their homes as they get older, presumably only switching to specialized senior living if their depleting health absolutely demands it.
Robert Ranieri, Managing Director at Northmarq (a provider of debt, equity, and loan services to real estate owners and investors) and chairman of the Board of Directors of Wartburg Home, a senior residential and health care provider in lower Westchester County, New York, is acutely aware of this phenomenon. “You know, fortunately we’re all healthier, so we’re staying in our home for longer,” he said. “Twenty years ago, everyone thought that once a person got to be 60 years old, they would move to a senior housing complex, whether it was high-end or something less glitzy, but that simply isn’t the case anymore.”
More seniors than before are choosing to age in place, but this trend is not enough to offset future demand for other types of senior housing. Projections by JLL indicate that the senior housing industry is stepping into a decade-long investment cycle, and even so, the sector will still be undersupplied by 600,000 units by 2045. In order to support peak demand levels, there needs to be an annual supply growth north of 25,000.
In theory, it should make a favorable scenario for lenders, but that’s not necessarily the case according to Ranieri. “I’m from the lending side, and the fact that only a few people would be willing to lend on a senior housing product just tells you, at least from my perspective, that it’s got to be high-yield,” he said. “Investors are going to expect higher returns and higher yields because it’s so labor-intensive. It’s not just housing, it’s care of people, whether they’re healthy and active or not.”
The labor-intensive aspect of the sector is exactly what makes it so tricky, both from an operational and a cost standpoint. Both the personnel and the residents of a community have a human component to consider when it comes to senior living. It’s also a very operations-intensive industry that requires specialized management compared to other property types. For any other revenue-generating commercial property, the landlord and manager’s interests are kept in line by a range of joint-venture agreements between owners and operators, regular lease forms, and alternative structures. But there is just more at stake when the well-being of vulnerable, elderly tenants are involved. So both capital suppliers and on-the-ground operators are looking for highly specialized partners. Think about it: If a commercial landlord clashes with their property management firm, there aren’t many barriers, beyond contract stipulations, that prevent a landlord from hiring a new one. But property management firms for senior housing developments, no matter the property type, are far more specialized and can’t just be changed out easily. If an operator is replaced, what happens to the residents who live there and the care staff that serves them?
Labor is typically what drives senior housing costs for the tenant and eats the ROI for the property owner, even when there isn’t enough staff to go around. Senior living worker shortages have forced an alarming number of facilities to cut down on their admission rates for new tenants. Out of 759 nursing home providers surveyed by the American Health Care Association/National Center for Assisted Living (AHCA/NCAL), 98 percent of them have struggled to hire new staff, and 61 percent of providers have limited new admissions due to staffing shortages.
Senior housing of all types is getting more expensive, not just because of rising labor costs. Just like retail real estate, office, and multifamily, senior housing developments are feeling the sting of inflation, high interest rates, construction delays, and increased costs of construction labor and raw building materials. It’s made it extremely challenging to get lenders on board with new developments that are so desperately needed. “With the cost of building and staffing today,” added Ranieri, “I don’t know how you get that return. The price is just going to have to continue to escalate.”
Escalating prices are making senior living a messy subject, even for the companies that operate them. With current market fundamentals pushing up the property management, food, and labor costs, senior living companies are out to shed exposure by putting themselves on the market. Brookdale Senior Living, the largest owner and operator of retirement homes in the U.S., is reportedly in talks to sell. The news comes on the heels of other operators changing hands as the cost of doing business continues to creep even higher.
Those escalating prices need to be paid somewhere, so they’re often passed off to the tenant. For any other property type, rising costs can be written off as the nature of the local market, but for seniors who have retired or are too frail to generate extra revenue for themselves beyond their fixed income, this is extremely problematic. Lack of affordability makes otherwise viable housing options elusive for seniors. While wages for seniors continue to be largely steady, prices in the US home market are rising, and that’s not even factoring the cost of the supportive services that older citizens would require from senior housing developments. And the price tag will only get higher as time goes on. By 2047, the overall expense of care for the elderly in America will have doubled, from $2.8 trillion to $5.6 trillion. But solving for affordability is a complex problem with no simple solution. For Ranieri, not-for-profit senior housing is a promising avenue. “Not-for-profits can do senior housing on their campuses at a cheaper rate,” he said. “You’re not going to have government meals, but it’s the same level of care.”
With so many moving parts to manage, the senior housing market was once thought of as a niche asset class. But with an apparent crisis around the corner, there’s a major opportunity for real estate investors. There may not be a simple solution, but the main thing that’s crushing affordability in senior housing is demand. Yes, inflation is at a four-decade high and there’s a shallow labor pool, but the turbulent economic landscape that’s supporting both of these factors are expected to balance out, at least to some degree, in the coming years. But with demand, there eventually comes supply. Developments are popping up across the U.S., with more slated to break ground in the coming years. As more investors jump on the bandwagon, more options will enter the market. The competition will heat up, and consumers will have more options of care as well as price. But if there’s one thing real estate investors know, it’s that a building’s quality will be the biggest market differentiator, no matter the sector. Senior housing may be a unique asset class with a lot of challenges, but it’s an asset class that suits a permanent societal need, making it a high-yield commercial investment.