Seniors Housing Blossoms
The outlook is rosy for this perennial investment
n terms of net operating incomes and real estate
market values, America's long-term care industry is about equal in size to the
hospitality lodging industry -- a fact that surprises most people but makes
sense given the aging U.S. population. Since its quiet turnaround starting in
2003, seniors housing has experienced increased activity, particularly right
now: Long-term care facilities have an estimated total capacity of 3.68
million, according to the National Investment Center for the Seniors Housing
& Care Industry, with occupancy rates hovering around 90 percent. Occupancy
will continue to rise as senior population demographics increase unless
construction keeps pace.
On the investment side, capitalization rates have fallen dramatically
during the last 24 months with certain sectors experiencing declines of up to
300 basis points. The sector's high demand, stability, and improved occupancy
rates are driving these declines and correlated pricing increases. For example,
Nationwide Health Properties, a real estate investment trust in Newport Beach,
Calif., last fall paid around $171 million for 13 skilled nursing homes and one
assisted-living facility in the Northeast. The price is about $92,000 per bed,
almost twice the previous year's average price per bed for that region,
according to McKnight's Online. Another major deal involved Ventas REIT in
Louis-ville, Ky., buying six retirement communities for $85 million or around
$89,000 per unit. Both transactions were structured as sale-leasebacks.
Competition from institutional investors also is driving up prices for top-tier
seniors-housing properties, as they seek to diversify portfolios.
Photo caption: Wilkinson Coep., a holding company for 34 West Coast
seniors-housing communities, is diversifying its portfolio by purchasing
properties in midrange markets, including the Gardens, a four-property
assited-living facility located in Orange County, Calif.
Photo credit: Wilkinson Corp.
While today's seniors-housing investment market bears resemblance to
that of the late 1990s, sophisticated investors knowledgeable about
seniors-housing pitfalls are making all the difference. Having learned from the
mistakes of the 1990s, today's investors and developers are making wiser
decisions and seeing better returns. The long-term care industry holds great
potential, and understanding its fundamentals and learning from the past are
the keys to success in this segment.
Shifting supply-and-demand dynamics have been a major force in the
long-term care segment's recovery from the late 1990s market slowdown. During
the last five years, annual demand for seniors housing has averaged 29,700
residents per year according to the NIC, and construction of seniors-housing
units has averaged 23,200 per year. With demand exceeding new supply by about
6,500 units each year, occupancy rates have been climbing steadily.
Several factors have contributed to the supply-and-demand shift. First,
seniors-housing companies have changed their development strategies,
dramatically cutting back on new construction compared to the late 1990s. For
example, in the assisted-living sector, new construction has averaged about
6,000 units per year over the last four years compared to roughly 30,000 units
constructed annually in the late 1990s.
The second reason for the shift is the aging population. According to
the U.S. Census Bureau, the "roaring 1920s" babies, who currently
make up about 5 percent of the population, are creating greater demand for
these facilities. This demand will increase as the population growth rate of
seniors age 75 and older skyrockets in the next 10 years to 20 years.
Increased understanding that quality of care is just as important as
real estate performance is another factor contributing to industry growth. In
the 1990s, many people hopped into the long-term care industry seeing quick
cash and hot real estate, but they did not understand the industry for what it
was - a business that could wither without high quality of care for residents.
Today savvy investors looking to get into the industry consider high-quality
care a major determining factor.
Operators also play a major role in the industry. The 1990s saw many
inexperienced operators who didn't understand long-term care's intricacies.
They viewed it as a hospitality model and entered the industry in hopes of a
quick, sizable return on investment. The downturn pushed these operators aside,
making room for those who understand what it takes to run a successful
long-term care property. Efficient operators know what works and what doesn't,
leading to better business models that attract both investors and residents.
Characteristics of today's most successful properties include larger unit
sizes, state-of-the-art amenities, quality locations, and higher service
levels. As a result, quality properties don't sit on the market very long and
portfolio sales are rising; older properties with smaller units are taking
longer to sell.
Finally, the industry has learned a valuable marketing lesson about its
primary users, which is affecting location decisions. Today's customers not
only are seniors but also their adult children who frequently are involved in
their parents' housing decisions. For example, if a parent is ill or suffering
from Alzheimer's disease or another form of dementia, adult children make
long-term care decisions. For this reason, some major seniors-housing providers
are strategically placing facilities closer to concentrations of baby boomers,
rather than concentrations of seniors, to make their properties more
Photo caption: Sterling Senior Communities in Temecula, Calif., was acquired by MBK Senior Living in an all-cash deal. The facility has 51 independent units, 73 assisted-living units, and an Alzheimer's care facility.
Photo credit: MBK Senior Living
Long-Term Care's Outlook
Industry insiders agree that long-term care's outlook is positive,
especially in the next five to 10 years. Several factors will weigh heavily
into just how successful the industry will be.
Supply-and-demand dynamics, again, are creating a foundation for future
growth. A strategic building approach will continue to prevail across the
industry; gone are the days of thinking "if we build it, they will
come." Today's industry insiders are more in tune with the realistic needs
of the rapidly aging American society.
Demographics are another key factor. The baby boomers, which make up 26
percent of the population, have longer life expectancies and have shifted away
from living with adult children in their old age, unlike previous generations.
They're also more willing and able to pay premium prices to maintain
independence in their senior years. Finally, the 85-year and older population
is estimated to grow three times that of the U.S. population as a whole this
decade, according to the Census Bureau. These statistics demonstrate the
growing need for care and housing for this population segment.
The long-term care industry's maturation also has made these properties
attractive to investors and potential customers, and the diverse range of
options within the industry is expanding.
Finally, in terms of financing, select lenders are bullish on the market
- approaching each opportunity with intense due diligence to ensure strategic