The Senior Housing Boom
By: Thomas Grape, chairman and CEO of Benchmark Senior Living. The material in this column is drawn from a program held by NAIOP Massachusetts in Boston that was moderated by Ryan Maconachy, managing director, HFF. Other speakers included Chris Kazantis, director of AEW Capital Management; Ted Tye, managing partner, National Development; and Alfred Wojciechowski, principal, CBT Architects.
The Commons in Lincoln, a Benchmark Signature Living Lifecare Community in Lincoln, Massachusetts, features cottage homes and apartments as well as a cafe, restaurant, library, fitness center and more. It offers extensive wellness and activity programs for independent senior residents; a health care center currently is under development. Expected to open in two phases beginning in late 2015, the center will include assisted living, memory care and skilled nursing neighborhoods as well as rehabilitation services.
Senior housing has been a hot topic and a strong commercial real estate investment class for several years. According to Real Capital Analytics, senior housing and care facilities year-over-year sales volume increased by 30 percent in the second quarter of 2014. This asset class encompasses various niches; it is no longer just your grandparents’ nursing home or your parents’ 55+ community.
To better understand how to invest in and profit from senior housing, investors need to understand the different property and service types that make up this growing portion of the market. These include the following:
Senior Apartments are age-restricted rental units. These may be operated by local housing authorities for lower- to middle-income tenants, or they may be market-rate units that are privately developed and operated. In either case, they provide limited services besides basic housing.
Independent Living Facilities cater to still-active seniors who do not need assistance with daily living activities. In addition to housing, these communities typically offer residents meals, laundry services and social activities.
Assisted Living Facilities cater to residents who are no longer capable of performing all of the activities of daily living. These communities offer more health-related services, including intermittent nursing care and assistance with daily medication, bathing, dressing, etc.
Memory Care Facilities are niche facilities operated to meet the needs of individuals who have experienced significant memory loss, such as those suffering from Alzheimer’s disease or other forms of dementia.
Nursing Homes, also known as skilled nursing facilities and long-term care facilities, are the most expensive and offer the highest level of service. These properties, which cater to residents who need skilled nursing care 24/7, are just one step below hospitals. A significant portion of these communities’ income typically comes from Medicare and Medicaid.
Continuing Care Retirement Communities (CCRCs) offer the strategic benefits of a broad-based continuum of services, from independent living through a full-service nursing home. This platform also allows residents to stay in the community if or when their circumstances change.
Although some investors prefer communities that provide just one level of care, more recently, investors have been choosing communities that provide multiple services that allow residents to age in place.
All Types of Investors
Investors of various types and back-grounds are actively backing senior housing throughout the nation. Publicly traded REITs specializing in health care and senior housing have boomed in the last five years, and three of the largest health care REITs — Ventas Inc., HCP Inc. and Health Care REIT Inc. — are among the largest REITs in the U.S. This investor group typically intends to buy and hold for the long term.
Some opportunity funds are comprised of investors who are comfortable with more risk but expect a higher rate of return, and typically buy existing properties to turn around or build ground-up developments within a three- to five-year window. Other players have emerged; today, approximately 60 percent of senior housing buyers are from private capital sources. This group includes private REITs, pension funds and high net worth investors. In addition, banks and other lenders have shown growing interest in senior housing, especially with the near-record low interest rates of the past several years.
The return on investment (ROI) on these properties has outperformed all other classes of commercial real estate over the past seven years, many of which were engulfed in the Great Recession. Rental rates have not declined, which clearly was not the case in most other commercial sectors, notably retail and multifamily. According to a National Council of Real Estate investment Fiduciaries (NCREIF) study that compared all classes of real estate during the recession, senior housing was the only asset class that continued to experience rental rate growth.
On the downside, positive cash flow takes longer to achieve on new senior properties, as the rental absorption rate averages only about four to six units per month, much slower than a typical multifamily property. However, because this is a newer, niche asset class, the cap rate on senior housing is about 7 to 8 percent nationally; in the affluent Northeast and West Coast markets, it is in the 6 to 7 percent range. Senior housing cap rates are almost 40 percent higher than cap rates on multifamily properties.
The Right Operator Is Key
Seasoned investors say the most important factor for a successful senior housing project is an operator with the required resources and experience. The operator can be a make-or-break factor in the profitability of an investment. Different operators have different niches, directives and strengths; some may be much better than others at managing specific types of senior housing. This is an important factor that any institutional investor should analyze carefully.
When asked which type of new senior housing property offers the best investment opportunity, AEW Capital Management Director Chris Kazantis suggests looking for a community with the following elements:
- A continuum of care that enables residents to remain in the community as long as possible (in other words, customer retention);
- Between 80 and 150 units;
- An operator with recent success at providing a 35 to 40 percent profit margin for the business;
- A memory care wing, since the population of seniors needing this care is growing and will continue to grow over the next 12 to 15 years as baby boomers age;
- A building design with an independent and attractive look and feel; and
- Affinity groups: a residential community based upon a common trait or interest, such as religion, a university, an activity, etc.
Nationally, senior housing development is still on the uptick and well below the saturation point. New England is closer to the plateau of the cycle than other regions; potential saturation could be just a couple of years away. In some isolated areas, saturation and potentially struggling facility occupancies and economics have occurred as developers new to senior housing have attempted to “get in on the action.” These new developers often make poor decisions, which not only leaves their communities hurting, but impacts existing nearby senior developments as well.
Senior housing, in all its variations, is here to stay. Demand for these facilities can only rise as the bulk of the boomer generation reaches age 80 and older within the next 10 to 15 years. But with all the interest comes potential risk. Not all senior developments will be successful and profitable. Selecting the right ones to invest in still involves proper due diligence and an excellent understanding of this unique and changing asset class.