New opportunities starting to emerge in senior housing market

LONDON: A number of new opportunities are starting to emerge in the seniors housing market.

The findings are clear: The senior housing sector continues to be a winner. Recent data from the National Investment Center for Seniors Housing shows that in 2019, despite a slight drop in total transaction volume to $14.1 billion, the sector still generated returns bested only by the red-hot industrial sector.

But many investors are wondering how much longer these types of returns might last, and rightfully so. With the sector’s success comes higher valuations and compressing cap rates. NIC data shows that senior housing reported an average price per unit of $175,913, with an average cap rate of 5.9 percent. That means senior product is verging close to multifamily territory where capitalization rates leveled out at 5.5 percent and an average price per unit of $191,463.

And it appears senior housing investors are bracing for more of the same returns in 2020. According to “JLL’s Winter 2020 Seniors Housing Investor Survey,” investors are predicting cap rates to hover somewhere around just 4 percent for the sought-after Class A core Independent Living product. Seventy-two percent of respondents said they expect no cap rate change in the next 12 months.

The higher PPU and expected stability of already low cap rates means we could be headed toward a misalignment of expectations between buyer and sellers on pricing, decelerating activity, especially with a wave of new construction delivering and the pipeline slowing dramatically.

But there are opportunities for yield out there if you look in the right places.

ACTIVATING ‘ACTIVE ADULT’ INVESTMENTS
The ‘Silver Tsunami’ of Baby Boomers is here, and investors chasing yield are already finding creative ways to tap into that cohort earlier. The Active Adult sector—an evolving product type that provides services such as meals, transportation, housekeeping and activities a-la-carte vs. an all-inclusive model like independent living—saw a surge in investment activity in the second half of 2019.

Driven by the desire to capture Baby Boomer demand before they move into assisted Living, investors spent 40 percent more year-over-year on Active Adult assets through the third quarter of 2019, with an average cap rate of 5.9 percent.

We expect this trend to continue, and so did our survey respondents. Nearly 25 percent said the Active Adult sector was the biggest opportunity of 2020 behind only Independent Living, noting a cap rate discount ranging between 40 and 60 basis points compared to Independent Living. And it’s likely this trend will persist over the next several years.

But senior housing specialists aren’t the only ones with their eyes on Active Adult assets. While multifamily remains the most liquid asset class in the U.S. market, rent control issues and increased competition for assets is pushing some multifamily investors to consider the relatively high yields of the Active Adult sector.

THE FUTURE OF AFFORDABILITY
Investors may also be wise to take notice of the larger cohort of middle-income seniors who may have trouble affording senior housing. This group, often neglected because they do not have the financial means to secure senior housing accommodations but make too much money to qualify for Medicaid, are being called the “Forgotten Middle.”

According to data from a NIC study, it’s estimated that by 2029 over half of middle-income seniors older than 75 will not have the financial resources to access existing private pay senior housing and care options. The last of the baby boomer generation will turn 75 in 2040, which will likely double this number.

This poses a huge opportunity for developers: That same study predicts that at today’s utilization rates, more than 700,000 senior housing units will be needed to satisfy middle-income demand by 2029. But it will take some innovation and ingenuity to lower costs.

LOOKING AHEAD TO 2021
While we’re still several years away from the middle-income opportunity coming to fruition, investors are taking advantage of opportunities now. JLL’s survey shows investors feel senior housing is a strong bet for the year ahead, with 60 percent of respondents saying they intend to increase their exposure to the sector.

And where will they be putting their money? Survey says: Independent Living. Nearly 28 percent of respondents said they see Independent Living as the biggest opportunity for investment over the next 12 months, followed up Active Adult and Assisted Living (21.5 percent).

As for what keeps senior housing investors up at night, it may be unsurprising to hear property-level operating costs (44.6 percent) and supply-side pressure (29.2 percent) led the pack in JLL’s survey.