A new generation of seniors housing properties is attracting younger seniors, according to panelists speaking at the 2015 NMHC Research Forum, held April 1-2 in Washington, DC.
“It’s not just the 80 and 85 year olds,” says Calvin Schnure, Senior Vice President, Research and Economic Analysis for the National Association of Real Estate Investment Trust (NAREIT). Seniors in their 70s or even younger now move into properties that provide activities and luxury amenities. “Instead of a move based on need for skilled nursing or medical care, it is increasingly a choice of lifestyle.”
New seniors housing properties attract younger seniors with a variety of choices. Independent living communities offer a long list of social and educational activities. Assisted living communities offer activities plus medical services for residents who need more care, though these services are less intense that those offered at a skilled nursing community. Continuing Care Retirement Communities offer seniors the ability to age-in-place, utilizing more services as they become more frail.
“As late as the 1990s, the only choice was the nursing home,” says Philip Martin, vice president of market research for Waterton Associates. Skilled nursing facilities now make up less than half of the seniors housing in the U.S., according to the National Investment Center for Seniors Housing & Care (NIC).
Seniors are now much more likely to move into seniors housing properties than in prior decades - especially younger seniors. The percentage of people living in seniors housing has grown for all the age groups seniors, most dramatically for relatively young seniors in their 70s. That’s especially important as the oldest Baby Boomers approach their 70th birthday.
Over the next decade, the number of people who are more than 75 years old is likely to grow by 3.2 percent a year, from 19 million now to 26 million in 2025. As the population of senior citizens grows, the number of people who chose to live in seniors housing is expected to grow to 2.2 million by 2025, up from 1.7 million today, assuming a penetration rate of 7 percent to 10 percent. That works out to a need for nearly a half-million new units of seniors housing units over the next 10 years.
Seniors are also much more likely to move into seniors housing if they have higher wealth, according to Schnure. That’s especially relevant as the Baby Boom generation ages, since more high-net worth individuals belong to the Baby Boom Generation than any other generation in history.
Strong fundamentals attract investment
Seniors housing properties performed well even during the toughest years of the Great Recession, earning an average annualized total return on investment of 14 percent over the ten years that ended 2013, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). That’s better than the 10 percent earned by apartment properties overall over the same period or the eight percent earned by the NCREIF Property Index. Investors are drawn also to the business by strong fundamentals. The vacancy rate is currently nine percent - fairly strong for this asset class.
Owning seniors housing carries different risks than conventional apartments. Seniors housing operators provide meals at many properties along with intensive health services. Seniors housing properties must comply with all of the relevant state and federal regulations. An incompetent operating partner can quickly damage a community’s reputation and its revenue potential.
Partly because of these risks, prices for seniors housing properties are relatively low compared to the income produced at the properties. Capitalization rates for seniors properties now average more than 500 basis points over the yield on 10-year Treasury bonds, more than 200 basis points above average cap rates for apartment properties overall, according to data from NIC-MAP.
“As an investor, you are being paid and being paid well for the risk you are taking,” says Martin.