A Mature Market
Seniors housing is a growing sector within commercial real estate. But while many casual observers assume the potential is tied to demographics, with baby boomers reaching their golden years, the math doesn't quite add up.
“Those major demographic changes aren't quite here yet,” says Beth Mace, chief economist and director of outreach at the National Investment Center for Seniors Housing & Care. “The typical resident in seniors housing is 83 and older. The baby boomers were born between 1946 and 1964; so, today, the oldest baby boomer is 74.”
The demographics portend growing demand in the next decade. But what helped attract more investment in the sector in recent years is increased transparency and better understanding of the sector. Data on occupancy rates, rents, transaction volumes, demand and supply drivers, and returns on investment increased interest in seniors housing as a whole. Its relatively strong rent and investment performance during the Great Recession in 2007 to 2009 also contributed to interest. Wall Street analysts have also increased tracking trends and it has become a viable piece of portfolios. “Institutional investors have been heavily involved in the sector now for 15 or more years,” Mace says. “Another part of the reason that they are attracted to seniors housing is that it is a diversifier for a portfolio. It's somewhat countercyclical and there's a need-based component to it, especially assisted living. It can also be countercyclical to other asset types in a commercial real estate portfolio.”
In the 2000s, Mace says, large pension funds began to invest in the properties, which helped increase liquidity across the sector. “More transparency and more liquidity in the sector are acting to attract additional investment because you have someone to buy when you want to sell,” she says.
But seniors housing faces some unique challenges - in that properties have some characteristics related to hospitality and some to multifamily. “Unlike office or retail, seniors housing is also an operating business,” Mace says. “That may be an additional challenge from an investor's point of view. Even if you're strictly a developer, it can be difficult to find an operating partner who really understands the sector. There's a care component that requires experience, an understanding of people, and a desire to make a positive impact.”
While many operators are passionate about providing care for vulnerable populations, COVID-19 has made the already tough issue of staffing even tougher for both on-site business managers and investors. The Bureau of Labor Statistics pegged the U.S. unemployment rate at 3.65 percent in February 2020, a 50-year low. Such a tight labor market meant it was a struggle to find labor for these properties. “Roughly two-thirds of the expenses for seniors housing are associated with labor, so it's hard to cut that out when providing care like this. It's difficult to handle increased costs when working in this space.” Since the pandemic in March 2020, labor challenges have changed for many operators as some staff shy away from work due to fears of the virus and as hazard pay and other rewards for work have been implemented. That said, by all accounts, frontline workers and health care professionals have been nothing less than heroic in their efforts to make sure residents are safe. A significant challenge for all operators has been securing personal protective equipment (PPE) for their staff, as well as testing and tracing protocols. A lack of better preparedness on these measures at the national level has been a particularly difficult challenge for operators. Looking ahead, many of these challenges will dissipate once a vaccine is discovered and widely disseminated.
Accessibility, both by residents and staffing, is a significant issue in site selection for seniors housing developments. Rural facilities face difficulties due to operational inefficiencies. “When opening up a property, you want to make sure there's access to transportation and there's the necessary density of seniors and adult children,” Mace says. “We are also seeing a growing desire for residents to be integrated with a surrounding population. There's more interest from residents to have more purpose.” Today's seniors appear much more focused on the risks of social location, Mace says. While a lot of people will want to stay at home because its comfortable and familiar, seniors are desiring socialization and community, proven antidotes to loneliness and contributors to healthier lives and lifestyles.
Like any sector in commercial real estate, seniors housing has its share of challenges, but Mace remains optimistic about the future, thanks in part to the demographic tailwind provided by an aging baby boomer generation. “Despite the COVID-19 pandemic, the fundamental value proposition for seniors housing has not gone away. There will be some bumps along the way, for sure. But the bottom line is that people are still aging. That has not changed. Seniors housing continues to offer a powerful value proposition of socialization, health care, diet, exercise, medical care plan adherence, home care, hospitality, safety, generally care-free living, and fun. The growing future need for care and housing options for seniors and baby boomers is unprecedented and the opportunity remains huge,” she says. “I'm an advocate, but I'm not Pollyanna-ish about it because I know it's not all roses. There are challenges in the sector, but it can be and will be an attractive investment opportunity.”