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Seniors housing is a real estate investment category with a bright future, experts say. The National Investment Center for the Seniors Housing & Care Industry cites the sector as having a market value of more than $300 billion, with occupancy levels in Q2 2014 at 89.9% for seniors housing and 86.2% for nursing-care facilities. And Marcus & Millichap reports that for the first time in several years, all sectors of the seniors housing market are building momentum, thanks to a resurgent housing market, healthy employment growth and disciplined development.

Moreover, investor interest in seniors housing continues to mount. Case in point: Chicago-based Harrison Street Real Estate Capital recently completed the acquisition of an 11-property portfolio located in and around the Baltimore MSA; Philadelphia; Staunton, VA; and Newport, RI, valued at approximately $520 million. The acquisition both expands Harrison Street's seniors-housing presence in the Northeast and aligns the firm with the Shelter Group's Brightview Senior Living entity, a national operator of independent living, assisted living and memory-care facilities. This transaction is representative of many similar high-value acquisitions in the market recently, both in the US and abroad.

While some consider seniors housing part and parcel of the healthcare real estate sector, it is first a residential sector serving the housing needs of a growing senior population. Yet, healthcare in some form is becoming more prominent as service offering in many senior communities.

How Does Seniors Housing Differ From Other Asset Classes?

Alan Ursillo, SVP at JLL, who specializes in seniors-housing properties, tells Real Estate Forum that each of the four basic types of seniors housing—independent living, assisted living/Alzheimer's, skilled-nursing facilities and continuing-care retirement communities—has its own set of cap-rate metrics that determine value. “These different cap rates range from 6.5% for independent living to 12.5% for skilled-nursing facilities.”

Some experts break down the four main categories into smaller sub-categories such as active adult, age 55+, age 62+, affordable, skilled rehab, stepdown and more, Stephen Jones, chairman/CEO of Snyder Langston, tells Forum. “There are a lot of words to describe where this population is moving. Specialty developers and operators utilizing different business models—capital and price point—offer a wide diversity of products and services catering to occupants with varying care requirements and ability to pay.”

Seniors housing is also different from many other commercial asset classes in that it covers both real estate and operations, Al Rabil, CEO of Kanye Anderson Real Estate Advisors, tells Forum. “The huge element here is the operations. Seniors housing in general runs the full spectrum from age-restricted communities all the way to acute-care CCRCs. The operational intensity goes up with the higher level of care required, but the primary distinguishing factor is that it is both a real estate and an operating business.”

Dan Prosky, founding principal of American Healthcare Investors and the president and CEO of Griffin-American Healthcare REIT II, tells Forum that all of the seniors-housing categories aside from independent living are more needs-based housing services. “They're different simply because they're need-based and not a lifestyle choice. Independent living is more of a lifestyle choice that can be affected by the economy. People sell their homes to move into independent living, but they can delay this if they can't sell their home for the price they'd like.”

According to Chuck Harry, managing director and director of research and analytics for NIC, seniors housing proved particularly resilient during the recession. “While certainly not recession proof, seniors housing weathered the downturn far better than other commercial real estate property types, both in investment returns and operational performance. It shows much steadier and higher returns over time than other categories.”

The other aspect of seniors housing that distinguishes it from other asset classes is how it combines real estate and services, both hospitality and healthcare, says Harry. “That includes aspects of what's called ADLs or activities of daily living. Residents who need it are provided assistance with those activities. It may not be what most call healthcare—it includes dispensing of medication, bathing, etc. But the hospitality piece is one that's attractive to the residents in terms of their ability to engage with their peer group as an alternative to staying in the home where they raised their family. This provides them an opportunity to engage with others in their peer group and increasingly with extended family—we see communities that offer activities for grandchildren, too.”

Age restriction or targeting is, in fact, one of the biggest differences between seniors housing and other forms of housing or real estate, for that matter, Brendan Morrow, director of senior living for the Weitz Co., tells Forum. “Beyond that, there is no other asset class that blends residential with different levels of healthcare and resort-style amenities. Today's senior living is so different from the nursing homes of the past. The amenity spaces in some properties rival the highest-end resorts and deliver concierge-level services. On the healthcare side, almost all facilities have offerings that range from independent living all the way to hospice care on property. Many properties also offer physical training for transition from the hospital bed to the home, so you have healthcare onsite in most instances. As you move up the spectrum of care—independent to assisted living to memory care to skilled nursing—some of the residential nature gives way to healthcare services.”

From an investment perspective, it's a smart and stable asset class. “Simply put, one of the reasons we like seniors housing is the tenant base,” Michael Gaber, COO at WNC, tells FORUM. “When a senior resident moves into one of these properties, they generally don't move again. They tend to stay there and look at it as their home. Plus, they develop friendships with other seniors there.”

From an owner's perspective, that's a lot of stability. Because you don't have a huge turnover, there's a lower cost to maintain the units, and seniors frankly take better care of their units. When you have children in a unit, they're naturally going to be tougher on things—it's just a fact of life.”

Kasey Burke, president of Meta Housing Corp., tells Forum that while seniors-housing communities tend to take more time to fill, residents are more likely to continue renting the same apartment for a long time. “This differs from other multifamily communities that are constantly seeing a shift in tenants and experiencing a higher turnover rate.”

Achieving High Returns in a Fragmented Sector

First and foremost, delivering high returns to investors in seniors housing requires an operating platform or partner with strong operating capabilities, as well as cost efficiency, says Rabil. “Beyond that, experience is key. “We remember times when there was overbuilding—especially those of us in the business for more than 20 years,” says Prosky. “You have to be very careful of that. Experience is numbers 1, 2 and 3.”

Connecting with an operator who is experienced and provides quality outcomes is critical, says Harry. “There are very few national brands to speak of, but there are numerous regional operators who, be they small or mid-cap operators, are interested in growing and looking for capital to help make that happen. There's much opportunity to identify those players in the investment community.”

Because seniors housing has a very high investment-risk factor, an experienced operator is imperative, concurs Ursillo. “Seniors housing is a very volatile business because as seniors age in the continuum of care from independent living to assisted living to skilled-nursing facilities, operators lose residents either to death or to illness. Marketing is a key factor to keeping a constant flow of new residents to fill vacancies. Margins, therefore, range from the high teens to 40% for efficiently run operations in seniors housing.”

As in other sectors, knowing how to buy land well is important for successful returns in seniors housing, says Burke. “By selecting sites that are already close to a variety of services, such as grocery stores, pharmacies, hospitals and entertainment, we can deliver a better quality of life to our future residents. Selecting these locations can be a challenge, however, and requires expertise, tenacity, determination and a deep understanding of each market in which a project is planned. The site-selection process requires a willingness to explore a wide variety of opportunities. Developers must be flexible and take the time to find locations where they can deliver value and be successful.”

Morrow says achieving 100% occupancy is the key to profitability in this sector, and that is done by finding a niche or area of service that speaks to seniors. “This is where seniors housing might contrast from multifamily the most. Seniors—and their adult children helping them choose a community—definitely want a convenient location, but to differentiate your community from the others in your market takes an affinity or draw of something unique. That might be an affiliation with a university, a church, a health focus, a hobby or a lifestyle, but it's no longer true that seniors will automatically migrate to the nearest retirement community within five miles of their home. They'll drive past the 'vanilla' community down the street to go live in the one that invigorates their love of performing arts or where their memory loss can be stemmed or even reversed.”

Baby Boomers' Long-Term Impact

A new report by the Harvard Joint Center for Housing Studies and AARP Foundation finds that America's older population is in the midst of unprecedented growth, yet the country is not prepared to meet the housing needs of this aging group. The number of adults in the US aged 50 and over is expected to grow to 132 million by 2030, an increase of more than 70% since 2000. But housing that is affordable, physically accessible, well-located, and coordinated with supports and services is in too short supply.

Economic drivers show Baby Boomers are responsible for 80% of the aggregated wealth in America. Therefore, there's no denying this demographics' impact on the seniors housing sector now and for at least the next 20 to 30 years. According to Harry, the Baby Boomer senior-housing cohort and the renter cohort of age 25 to 34 are growing at the same pace, but the renter cohort trends down and turns to negative rent growth for much of the 2020s, “whereas the 75+ cohort continues to climb into the 2020s. By 2020, it will be averaging 3% growth or north of 3% growth through 2035, and during that time, only the renter cohort will have gone negative, even though the US population overall will be growing at a 0.8% rate. This means increased opportunity for investors, given such a high growth rate among that age cohort.”

Harry points out that most Baby Boomers are still too young to be entering seniors housing, where the average age early to mid-80s. “There are still a number of years before the lion's share of Baby Boomers will be entertaining their relocation into seniors housing. Right now, Baby Boomers are the adult children helping to share in that decision with their parents.”

However, once they do age into senior living, Baby Boomers will be expecting a whole new level of service, says Morrow. “The Baby Boomer wealth has provided them a lifestyle of personalized, nearly on-demand entertainment and fulfillment. It's naïve and foolish to think they'll give that up in their living environment once they turn 75. The Greatest Generation values shared experiences and feels an element of security in being part of a large but similar group. Not so with Boomers. This means that the 350-unit development with three unit-plan options won't address the Boomer's desire to be unique and experience things totally different from their peers. This is where I see a big change in the type of facilities. The locations and the services offered will need to change on the fly.”

Jones says Boomers are attracting a lot of dollars from seniors housing communities, with many providers looking to do a better job. “The CCRC category suffered over the recession since it was a challenge for people to sell their homes to move into these facilities, but with the improving economy, they are coming back into favor.”

Rabil says the seniors-housing sector has transformed dramatically over the last 20 years and will continue to do so over the next 20 years, thanks to the Baby Boomers. “The sector will continue to evolve, and you will have far more optionality. The Baby Boomer generation is the wealthiest in history, and we're close to doubling the number of Americans 65 and over during the next 20 years. This will increase penetration rates for the senior sector, and more people will be looking at the space as a living option—not as a place where they're going to die, but a space where they're going to live.”

We'll continue to see movement up the acuity chain as Boomers age, predicts Prosky. “A lot of things being done in assisted living today were once done in nursing facilities years ago. We will continue to see ancillary services provided to residents so they can stay longer in their existing setting rather than move up the acuity setting.”