senior housing

Investment Rising Rapidly in Age-Restricted Housing

Seniors housing & care is the largest “alternative” asset class based on investment volume over the past decade. Investment in the sector has been particularly robust over the past six years.

Annual buying activity from 2014 through 2018 averaged $17.5 billion. Investment in 2019 is on pace to reach at least $15 billion.

In 2018, acquisitions fell 7.7%. The year-to-date 2019 total slipped 6.2% from the prior year. Interest may have waned somewhat from seniors’ yield premium coming down and from overbuilding concerns (though construction has slowed considerably).

The larger driver for the slowdown in acquisitions activity is likely limited available product to buy, both individual assets and portfolios.

Investment is still relatively small in the 55+/active adult sector but rising rapidly according to Real Capital Analytics’ data, which covers all types of age-restricted income-producing properties, including active adult.

Acquisitions exceeded the $1 billion mark first in 2014 and reached $2 billion in 2018. Last year’s rise over 2017 was impressive at 13.7%.

Buying activity remains robust in 2019, and sales are on pace to exceed 2018’s total by a sizeable margin.

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

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.


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).

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.


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.

Senior Housing: Still the Best Long-Term Opportunity in Real Estate

In 2014, the senior housing industry experienced a phenomenal volume of M&A activity, with $25.7 billion of sales across 294 announced transactions. This figure represents a 130% year-over-year increase and the largest year in industry history, eclipsing the previous high of $22.6 billion in 2006.

This nontraditional asset class represented 6% of domestic sales activity in commercial real estate, despite only accounting for a fraction of the total market size. With a superior performance when compared to all other asset classes through the recession (year-over-year rent and NOI growth), coupled with overwhelming demographic trends, senior housing has come into its own. This has translated into more sales activity, more institutional investment and more development, both qualified and unqualified.

Does this mean that the red-hot senior housing sector is overheated? Is development outpacing demand? Do the current investment metrics make sense?

In 2011, the baby boomer generation began turning 65; by 2029, this entire generation will be older than 65 and will account for more than 20% of the total U.S. population. By 2050, the 65-plus age group is estimated to equal 83.7 million people, almost double its estimated population in 2014 (45.2 million); and by 2056, the 65-plus age group is estimated to be larger than the population under age 18.

While trying to understand these demographics, there is a wide-spread misconception about who a senior housing resident really is. The baby boomers in their 60s are not residents in independent and assisted living communities; not even close. Rather, they are the largest and wealthiest segment of the U.S. population that is influencing their 85- to 90-year-old parents’ decisions to move into senior housing and often partially subsidizing their stay. By extension, this generation is incredibly influential with respect to decisions regarding when to move, where to move, and the community amenities required.

In 2014, the average cap rates for independent living and assisted living facilities were 7.4% and 7.75%, respectively, representing a drop of 80 basis points (bps) from the year prior. The average price per unit climbed by 27% to $208,200, while Class A properties in core markets traded at significantly lower cap rates—in the high 5s to mid 6s.

Does a 200+ bps spread relative to market-rate multi-family make sense on a yield basis? Admittedly, there is more operating risk than with traditional apartments; however, in the private pay segment—which is where most of investment grade senior housing product falls—there is no government reimbursement risk and the aforementioned demographic trends are undeniable. For those chasing yield cap rates in the 6s and 7s, quality assets feels pretty good on a relative basis.

The senior housing total return for Q4 2014 was 3.67%, comprised of a 1.68% income return and a 2.00% capital appreciation return. In 2014, senior housing returned 19.30% (6.73% income and 11.99% appreciation). This is up from a three-year total return of 16.76%, resulting in a total return for senior housing that is 555 bps better than the NCREIF Property Index (NPI) return of 11.21%, and 609 bps greater than the multifamily total return of 10.67%. Over a seven-year period, senior housing returns have outperformed the NPI and multifamily housing in total returns, appreciation and income returns. The seven-year total returns for seniors housing are 34.10% and 19.96% greater than the seven-year multifamily and NPI total returns, respectively. The stronger performance seen in senior housing may reflect the fact that senior housing has seen continuous rent growth—despite deteriorating market fundamentals and the effects of the national recession on demand—and may reflect the need based nature of senior housing.

Within senior housing development, most projects still underwrite between a 9% to 11% yield on cost; within multi-family that range is between 5% and 7%. So when you can build to a 10% and sell at 6.5% to 7%, the 300 to 350 bps spread is pretty attractive relative to 150 bps+/- in multi-family.

Recently, there have been some conversations around the issue of overbuilding. Within the top 100 MSAs, only 12 markets have more than 10% construction relative to existing supply for independent living facilities. The median building age is 18 years and construction versus existing inventory is 3.7%. Only 15 markets have more than 10% construction relative to existing supply for assisted living. The median building age is 17 years and construction versus existing inventory is 5.3%. There are, of course, low-barrier-to-entry markets with overbuilding that have experienced saturation in every bull market such as Atlanta, Houston, Dallas and Denver; however, they represent the exception to overbuilding in senior housing.

Aside from the great development spreads, in which other asset class does stabilized, well-margined new construction often trade at 1.5x to 2x replacement cost? Public and non-traded REITs represent a huge percentage of the acquisition market and because their investments are in NNN or RIDEA structures, both of which have terms of at least 15 years, they are fairly insensitive to replacement cost compared to a private equity buyer working around a finite life fund. REIT investors are yield driven, and given the massive “senior housing land grab” that occurred from 2011-2014, are now starved for high-quality assets/operators whose enduring value will enhance their FFO ratios and fuel their continued growth.

Senior housing cap rates have always had a strange way of tracking multifamily, however, with a 200-300-bps positive variance. So as we enter into a potential rising interest rate environment over the next 18-36 months, will treasuries have a similar impact on senior housing valuations? My impression is that unlike a mature asset class like multifamily, senior housing has continued to compel so many new institutional investors since the recession (namely private equity and non-traded REITs) that the sheer amount of institutional capital flows will offset some of the degradation in valuations that a rising interest rate environment causes. Senior housing will be affected, but not in the lock-step fashion of other asset classes due to the increased number of investors for limited supply, coupled with strong demographic tailwinds.

Trends to watch in 2015/2016:

  • Aging seniors with care needs are everywhere. Institutional investors, who have historically been biased towards the top 30 MSAs across all asset classes, are now inherently more comfortable with senior housing in secondary/tertiary markets based on demographic trends and the quality/age of the existing stock in those markets. Those seeking yield have already begun to effectuate this strategy, and this will continue so long as a 100 bps to 150 bps delta exists between core and non-core.
  • Continued cap rate compression and increased competition for private pay senior housing, coupled with the recent emergence and favorable valuations of publicly traded, standalone skilled nursing REITs, will result in more yield seeking institutional investors entering the skilled nursing space than we have seen historically. The inherent government reimbursement risk will keep some from entering, but high-quality, purpose built skilled nursing/post-acute properties are trading at cap rates between 8.5% and 11%. Additionally, the non-traded REITs whose cost of capital through the retail network is typically in the 7s will be compelled to invest in more skilled nursing facilities when market-rate senior housing assets trade below their dividend yields.

What other asset class can boast being recession resistant, year-over-year rent/NOI growth to the tune of 2.4% from 2008 to 2011, the best five-, seven- and 10-year overall returns in commercial real estate, and will be so undersupplied in the next 15 to 25 years it would be hard to build enough product to satiate the supply/demand imbalance?

None. Only senior housing.

By Aron Will, Executive Vice President, Debt & Structured Finance, CBRE National Senior Housing