Real Estate Boom: Baby Boomers Stimulate Senior Housing
What’s up with senior housing? Consumer demand, investor interest and sales prices, that’s what. With more than 10,000 baby boomers turning 65 years old on a daily basis, and 25 million newly insured by 2017, the senior housing industry is certainly poised for growth.
Those were a few of the points made on a recent “Commercial Real Estate Show” episode about senior housing. I interviewed a few industry icons about the current and future performance of the sector.
Something for Everyone
“When you consider the main types of senior housing products, assisted living has had the most investor demand,” said Rob Whitmire, president of the National Senior Living Group at Bull Realty.
You can break down the four basic types of senior housing based on care delivery. With its community-oriented feel, independent living offers housing for seniors that are mostly able to take care of themselves. Assisted living is a state-licensed facility with 24-hour medical care that varies based on the needs of the individual; these properties focus heavily on the social aspect as well.
Skilled nursing offers state-licensed, 24-hour medical care. Finally, continuing care retirement communities allow a person to move throughout the property from independent living to a situation requiring more care.
Strong Outlook for Demand
During the next 10 to 20 years, a large number of baby boomers will be moving into these various types of senior housing properties, said George Yedinak, publisher of Senior Housing News. Assisted living is one of the service types growing at a fast pace and adding more dementia and Alzheimer’s care, he added.
“Owners and operators have to consider how we are going to service them and the various demographics of this group coming into their retirement. This presents opportunities as well as some challenges for senior housing developers, owners and operators.” Yedinak said.
When it comes to location analysis, most senior housing customers live within 5 miles of the property. So there are opportunities for development all over the country. “Seniors are looking to stay closer to their friends and family instead of moving their lives to a completely different place,” Yedinak said. “It’s important for developers to deliver products to local markets that offer this access but care services as well.”
Whitmire spotted an interesting trend in the senior housing market. In 2011, investment sales totaled more than $85 billion. Sales volume was $58 billion in 2012 and $50 billion in 2013. “This might look like sales are tapering off, but what’s actually happening is that there’s significant demand and not enough supply to go around,” he said.
The strong performance of the senior housing sector is attracting more capital, said Dave Hegarty, president and CEO of Senior Housing Properties Trust. REITs, private equity and investors that have traditionally purchased multifamily properties are actively pursuing investment opportunities.
Cap rates are low across the board, but really vary based on the type and location of the property. “For a truly Class A product in an urban setting, cap rates are as low as a high 5 percent to mid-6 percent,” Hegarty said. “Outside of an urban setting, you are looking at a 7 to 7.5 percent cap rate. Class B properties in a non-urban setting have cap rates of 7.5 to 8.5 percent.”
Debt and equity capital for development and acquisition is readily available, said David Boitano, senior investment officer at Ventas Inc. “When I first started as an operator in the mid-90s, it was difficult to get capital to develop or acquire a senior housing asset. Today, there’s a growing menu of capital providers that have come into the market.”
Affordable Care Act
Of course, a real estate market tied to healthcare is not merely supply and demand. Government policy has been front and center the past 5 years.
“Overall, the Affordable Care Act will have an impact on what products and services are offered within the senior housing continuum,” Boitano said. “The ACA shouldn’t have a strong impact on the brick-and-mortar location itself in the coming years, but it will have one over time as housing becomes more integrated into the care delivery aspect.”
Independent living facilities have started bringing in more products through programs associated with home- and community-based services, as part of the Affordable Care Act, Yedinak said.
Nursing homes that are aligned with hospitals are poised to see the biggest change, Boitano said. “Hospital systems and nursing homes are working together to find a suitable environment for patients that are ready to leave the hospital, but not ready to go home. However, this will not eclipse the demographic growth that’s pushing the sector in general.”
Senior housing as a real estate sector is highly impacted by the business side of the required services. Knowledge of the delivery of care is important when investing in senior housing. While the majority of REITs own the real estate only, they fully understand how the business side operates.
For more on senior housing the original show audio is available at the show web site CREshow.com.
Michael Bull, CCIM, is the host of the nationally syndicated Commercial Real Estate Show and founder of Bull Realty, Inc., a U.S. commercial real estate sales, leasing and advisory firm headquartered in Atlanta. Michael on Twitter and LinkedIn.
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