Where will Aging Baby Boomers Retire To?

Over the next decade, the seniors housing industry is well-positioned for investment opportunity and, more broadly, for increased significance within the commercial real estate industry.

Rising demand, growing inventory and evolving product mix will create attractive opportunities and investment returns for owners, buyers and operators of seniors housing product.

Continuing care retirement communities (CCRCs), also known as life plan communities (LPCs), offer seniors the ability to live in one place for the rest of their lives by accommodating any changes in their lifestyle preferences and health-care needs. CCRC/LPCs typically offer the full range of seniors housing options, including independent living, assisted living, memory care and nursing care.

POSITIVES

Growth Opportunities
CCRCs, also referred to as life plan communities (LPCs), are well-positioned for growth in the seniors housing marketplace over the next decade.

Higher Occupancy Rates
CCRC/LPCs have higher occupancy rates than other types of seniors housing due to limited development activity in recent years, accompanied by steady demand and longer resident tenure.

Rent Growth
Current rent growth of CCRC/LPCs is consistent with the historical average of 2.8%, and has outpaced that of other types of seniors housing over the past few years.

Demographic Trends
Looking ahead, demographic trends will lead to dramatic growth in seniors population and in seniors housing demand. Between 2016 and 2025, the U.S. population aged 75+ will rise by 8 million or 39% (compared to only 6% for the U.S. population as a whole).

CCRC/LPC Demand
These demographic trends will also lead to significant growth in CCRC/LPC demand. The typical age of move-in for CCRC/LPC residents is younger than other types of seniors housing—in the high 70s to mid-80s—and CCRC/LPCs capture a wider age range of seniors than other seniors housing. Baby boomers are generally too young for CCRC/LPCs today, but that will begin to change in only three years as the oldest baby boomers turn 75.

Housing Market
Today’s healthy for-sale housing market creates a clear advantage for CCRC/LPC demand. New residents typically sell their homes and use the proceeds to buy into a CCRC/LPC.

Unique Characteristics
Two unique characteristics of CCRC/LPCs should make them particularly appealing to baby boomers. They are focused on lifestyle enhancement. They also attract “planners”—individuals and couples with a long-term outlook on their housing needs and a desire to plan for their future.

Investment Interest
From an investment standpoint, interest in seniors housing product has increased significantly in recent years. The traditional sources of capital, such as health-care REITs and private buyers, remain very active. New sources of capital, including institutional and foreign, are bringing more capital into the sector.

Benefits for Prospective Investor
The increased investor interest in seniors housing bodes well for CCRC/LPCs. However, the product’s unique qualities, especially entrance-fee CCRC/LPCs, appeal to a specific subset of investors. The benefits for prospective investors include a yield premium on pricing over other seniors housing product, less variability in occupancy and less risk of oversupply.

CHALLENGES

Oversupply Risk
While CCRC/LPC development, overall, appears balanced with demand, the amount of construction in the for-profit sector is high and may be at risk of temporary saturation in a few markets.

Other Options
CCRC/LPCs compete somewhat with stand-alone seniors housing communities, particularly independent living and assisted living, as well as active-adult housing. Independent and assisted living have experienced considerable development in recent years and provide viable options for seniors.

Increased Competition
The relatively high level of development activity in the non-CCRC/LPC space has created product that may be more appealing from a design standpoint than many older CCRC/LPC properties.

Need for Modernization 
Older CCRC/LPCs may require significant modernization, especially when baby boomers enter the market in a few years.

Entrance Barriers
CCRC/LPCs’ upfront entrance fees and monthly service fees are too high for most middle-class Americans, leaving the target market mostly to upper-middle-income seniors with the ability to sell a home to generate entry-fee payment.

Housing Market Dependence
Since CCRC/LPC demand is tied to the for-sale housing market, a national economic downturn may hinder the market. However, secular and cyclical trends will likely mitigate the impact of any potential downturn or recession.

Lack of Knowledge
The CCRC/LPC format, particularly its financial structure, is not well understood by consumers, despite being an established seniors housing option. CCRC/LPC owners and operators must continually educate prospective residents. This contributes to the long decision-making process for new CCRC/LPC residents.

Savvy Investors
Similarly, only seasoned investors have a thorough understanding of CCRC/LPCs. Others need to become educated in the financial model before they invest.

Limited Investment Opportunities
Even for the knowledgeable investor interested in CCRC/LPCs, not many communities actually come to the for-sale market, thereby limiting investor opportunity.

CCRC/LPCs play a critical role in the seniors housing industry by providing a unique and long-accepted housing option for seniors. CCRC/LPCs also represent valuable management, ownership and investment opportunities for a wide variety of capital sources and real estate operators.

The current strong market conditions— relatively high occupancy, rent growth outperforming other seniors housing sectors and somewhat limited new supply—position CCRC/LPCs for solid performance in the near term.

The CCRC/LPC world is evolving, though, possibly moving away from its core model of entrance fee and full continuum-of-care housing. This trend must be carefully monitored.

The biggest change on the horizon, however, is the first wave of baby boomers coming into the target age range within the next five years. In addition to the large increase of population at the target ages, CCRC/LPCs are expected to strongly appeal to baby boomers, given their life experiences and character.

The baby boom demographic wave should have an enormous and very positive impact on the market by creating considerable new demand for CCRC/LPC product. Initially, demand from baby boomers will rise at a slow pace, but by the mid-2020s, the increase will be much more significant.

While the CCRC/LPC segment of seniors housing must continue to evolve to meet changing demands of the consumer, the long-term outlook for CCRC/LPCs is quite positive.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

Download ‘Continuing Care Retirement Communities’ market insight here.