by Quest Business Sales 
Getting better with age Investment opportunities in senior housing
by Mard Naman a freelance writer based in Santa Cruz, Calif.
The senior housing sector has grown up, thanks to vastly improved data and transparency and consistently high returns. And when it comes to demand, its golden years lie ahead. Senior housing has grabbed the attention of institutional investors, and it is not hard to see why. The demographics alone are quite compelling: Every day 10,000 Americans turn 65 and that will continue for the rest of the decade. This is not a senior moment — this is senior momentum. While those 65 and over now make up about 13 percent of the U.S. population, that number jumps to 20 percent by 2030. And people are living longer: one in four people turning 65 today is expected to live to be 90; one in 10 is expected to live past 95. Furthermore, because people have been having fewer children, the number of younger family members able to take care of aging parents at home is going down. According to the U.S. Census Bureau, the number of potential caregivers aged 45–64 compared to the number of people aged 80 or more was 7:1 in 2015, but it will be only 4:1 in 2030 and 3:1 in 2050. There is clearly a growing need for senior housing and care communities in the short, medium and long terms. The average age of a senior housing resident is the low- to mid-80s, although for those who require memory care the average age is lower. A prime cohort is generally considered to be 75 and above, and here the demographics are strong, too: Today there are about 20 million people 75 and over, and that number is expected to grow rapidly by 15 percent to 23 million by 2020. “Looking ahead, an increasing population of U.S. seniors aged 75-plus will provide the foundation for a stable and growing base of new residents in senior housing communities,” says Dean Egerter, principal with Harrison Street Real Estate Capital in Chicago.
Many happy returns But you do not have to gaze into the future to see the benefits of investing in senior housing — just look at current and past returns. “Senior housing has consistently outperformed other real estate property types with regard to income, appreciation and total return,” says Chris Kazantis, director, AEW Capital Management. The senior housing (also commonly called seniors housing) sector has performed extremely well, whether you look back one year or 10 years. According to the most recent data from the National Council of Real Estate Investment Fiduciaries (NCREIF), total returns for senior housing were 16.1 percent over a one-year period, and 17.0 percent, 15.2 percent and 11.9 percent over three-, five- and 10-year periods. This beats all other major property types, including apartment returns, over the same periods (see chart below). Importantly, it also beats the NCREIF Property Index, which is made up of core U.S. institutional properties. The NPI registered total returns of 13.3 percent, 12.0 percent, 12.2 percent and 7.8 percent over those same time periods. “There’s no reason to think that the outsized returns that have been achieved consistently for the large institutional investors that report into NCREIF the past 10 years will change in 2016,” says Beth Burnham Mace, chief economist for the National Investment Center for Seniors Housing & Care (NIC). With this historical performance and bright outlook, it is no wonder the number of senior housing transactions involving institutional investors has been steadily increasing the past few years. “It is unusual to be able to invest on a current return basis that is higher than the other real estate types, combined with the NOI growth trajectory tailwinds that senior housing can provide,” says Kathryn Sweeney, co-founder and managing partner/CIO for Blue Moon Capital Partners in Boston. Blue Moon specializes in matching investors with operating partners and invests exclusively in senior housing. Noah Levy, managing director and senior portfolio manager, senior housing, for PGIM Real Estate, formerly Prudential Real Estate Investors, says his firm has been investing in senior housing on behalf of institutional clients for almost 20 years. “The outcomes have been well received,” he says. As NIC’s Mace points out, senior housing also provides portfolio diversification and is an asset type less dependent on the economic cycle. Indeed, most types of senior housing outperformed during the great recession, partially based on the fact that it is often a need-based decision to move into senior housing, especially for those moving into assisted living, memory care or skilled nursing facilities.
Senior housing types Senior housing exists on a spectrum depending on the type of care, if any, that is provided, and is commonly broken down into four segments:
Independent Living (IL): Housing for those who do not need help with activities of living. IL is distinguished from simple senior apartments or age-restricted housing because there is a commercial kitchen and common dining area. Twenty to 30 meals per month are usually provided. It is very hospitality-oriented, commonly with social activities, outings and transportation.
Assisted Living (AL): For those who do need help with their activities of living, such as getting dressed, bathing or eating. All meals are usually provided. Rooms are typically smaller than in IL, but there are more common areas.
Memory Care (MC): These settings offer AL services, plus special behavior/memory care services for those with Alzheimer’s or dementia. They usually feature secured-access only.
Nursing Care (NC): These skilled nursing facilities are for those who require 24-hour medical care and are facing end-of-life issues. But they are also now used for those recovering from surgeries such as hip or knee replacements. While IL, AL and MC generally rely on a private pay model, nursing care facilities are often government-paid (Medicare or Medicaid), and this has typically made them less desirable for institutional investors who prefer not to deal with the problems of government reimbursement.
While the four types of care levels can often be found as stand-alone separate properties, more operators combining care levels on one setting or campus. These are called Continuing Care Retirement Communities or Life Plan Communities and allow residents to “age in place” as they become more frail and have more physical limitations and health problems. There are two basic types of CCRCs: the “entrance-fee” CCRC, which requires an up-front payment, and the newer rental CCRCs, where residents pay as they go. Entrance-fee CCRCs generally include some number of pre-paid skilled nursing days, unlike rental CCRCs.
The maturing of senior housing
The sector has evolved a great deal and is aging well. “It’s 180 degrees different than it was 20 years ago,” says Sweeney. “The biggest difference is there was no transparency.” Back in the mid-1990s, investors could not find information on any competitive new supply coming into the market or comparable rents and could not benchmark their portfolios against anything. “Comprehensive, reliable and consistent information on transactions activity was no better than hearsay and word of mouth,” says Mace. “It was a bit of a Wild West.” And that lack of transparency meant capital was priced very high: the sector experienced a higher cost of capital than exists today, with cap rates averaging 10.5 percent for good quality product.
Make room for the boomers
Baby boomers make up close to 25 percent of the population, with the oldest boomers now about 70 years old. This means that boomers will really start to impact senior housing demand about 10 years from now. And this impact will last awhile. According to CBRE, about 69,000 units will be needed per year to meet peak demand in 2043, compared to about 39,000 today. Sweeney says her firm spends a lot of time trying to project what boomers’ preferences might be and how they will influence senior housing products when they enter their early 80s. She is glad there is still time to figure it out. “They’re disrupters, and they’ve always been disrupters through their age cohort,” Sweeney says. The boomers are one reason Sweeney likes independent living in the long term, which boomers see as less threatening than the other segments of senior housing. They like the hospitality model and the sense of community. She thinks being near major metros will be important, to serve boomers’ preferences for cultural and social amenities. Based on her belief boomers will want to age in place as long as possible, she likes operators who are experienced with independent living, but who can also be flexible and operate at the assisted living level as well. Mace believes the senior housing choices will expand substantially in the years before and after the first baby boomers turn 80. Investment dollars will flow into senior housing for both development and acquisition. And she believes investment in new types of housing options, many of which are still to emerge, will expand. Already we are seeing more “affinity group” housing for seniors, where people of the same race, religion or even graduates of the same college can choose to live together. To accommodate the desires of boomers, Mace thinks we will also see more intergenerational housing options, housing with friends in commune-type settings and more housing options for middle-income senior Americans.
With careful acquisition and development, and by partnering with top operators, investors will find excellent opportunities in senior housing today and far into the future.
