Will Pre-COVID-19 Senior Housing Trends Help Fuel a Post-Pandemic Recovery?

Like almost every category in commercial real estate, senior housing providers have been affected by the pandemic with most reporting a decrease in occupancy as people stay away due to fears of infection and an increase in COVID-related costs. It remains unclear whether these factors will remain in play for the long term, although almost certainly they will be part of the landscape until a vaccine or effective treatment is discovered.

As these companies navigate uncharted territory one surprising guide may be a look at the sector before the pandemic struck. As has been previously noted many times, commercial real estate’s fundamentals were relatively sound pre-COVID and it is hoped that at least some of these characteristics will help carry companies through this current crisis.

One source of new data comes from a JLL market research report completed before the COVID-19 pandemic, which found that the seniors housing sector posted its highest transaction volume in four years during the first quarter of 2020.

A total of 27% of respondents in the US Spring 2020 Seniors Houston and Care Investor Survey and Trends Outlook identified assisted living as the best investment opportunity for 2020, but 45% identified either active adult or independent living as the top opportunity, which also indicates high interest in those areas.

JLL also noted that construction labor and material shortages would affect supply. On the other hand, these shortages would also allow the market to soak up surplus product.

Over the last five years, occupancy trends declined due to overbuilding as investors and developers prepared for the aging baby boom population. But baby boomers will begin to turn 74 in 2020, meaning that the group is within 10 years of moving into senior living,

While the seniors housing market is currently oversupplied by 40,000 units, beginning in 2020 an additional 33,000 units per year would need to be added to meet peak demand, according to the report. That’s nearly double the current construction levels, which shows much opportunity for developers and investors.

Despite that, two factors conditions pose high potential for disrupting the market — the middle-income market and the active adult concept.

Citing a study by NIC Map Data Service, JLL reports that the number of middle-income seniors will double by 2029, growing to as many as 14.4 million people over age 75, and 60% may have mobility issues and 20% have high healthcare needs. While more than 700,000 housing units will be needed for that sector by 2029, according to the report, more than half of the middle-income seniors  may not be able to pay for private housing.

“This demand poses a huge opportunity for developers able to crack the affordability code,” JLL wrote in the report.

While 24% of investors who participated in the survey said they view the active adult sector as the biggest opportunity over the next 12 months, it is an “evolving product type,” because it provides amenities on an a-la-carte basis, rather than all-inclusive as in independent living. While many of the existing active adult developments target affluent seniors, investors see opportunity to build developments that are more affordable.

A total of 41% of investor respondents said increases in property-specific operating costs — wage growth continues to outpace rent increases — pose the biggest market challenge over the next year, followed by construction activity for 27% of respondents. They report continued confidence in current economic conditions, with only 14% identifying interest rates or other negative changes in the economic climate as a top concern.