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Senior Living has long been a somewhat vulgar real estate play and has a somewhat attractive reputation. But it’s at the edge of the boom – a baby boom to be precise.
Over the next five years, there have been over 4 million boomers reaching 80, and occupancy rates in both active adults and supportive communities are already rapidly increasing. This was the first time since the National Investment Centre for Senior Housing and Care began tracking metrics in 2006, as senior housing annual inventory growth was under 1%.
Ventas, a senior living real estate investment trust with a market capitalization of $31 billion, has a big bet on what CEO Deb Cafaro calls a long-lived economy.
“We buy billions of dollars a year in senior life and see Sevens coming in with low teenage to medium-term IRRs (internal return rates). “We’ve never seen a combination of investment characteristics in a long career in real estate, so we’re taking full advantage of all of that.”
According to Cafaro, the growth of the senior living demand pool is expected to reach 28% over the next five years. She called it chasing demand.
“Think about 2000 in the Real Estate Investment Fund business. Offices are over 20% of all REITs and healthcare is at 2%. Now, looking at Pie, the office is at 5%, what is it now? It’s healthcare, senior living. It’s a mobile phone.
Cafaro said Ventas, who buys real estate but has not developed, benefits from a shortage of supply, from active adults to memory care facilities, from active adults to supplementary living.
Sunrise in the senior living community in Lincoln Park, owned by Ventas in Chicago, Illinois.
Courtesy of Ventus
“As owners with one of the biggest footprints of senior homes in the US, we have installed bases and are actually acquiring assets below the alternative cost, which is why we benefit from development costs. “We really feel good about the foundations of the 850 senior living community, where occupancy is increasing, and we also feel good about the billions of dollars we invest in existing assets each year.”
Why is there no supply?
Aegis Living is a developer and operator of senior living facilities in Washington, California and Nevada. The imbalance of massive supply demand is heavily on founder and CEO Dwayne Clark.
“There’s a problem with brewing, and the only minor phor I can think of is like placing a party balloon at the end of the fire hose and seeing it increase at a great speed.
According to NIC data, there are around 4,000 new senior living units developed this year and next year, but increasing demand will require 100,000 new beds each year until 2040.
“This is the fewest unit I’ve seen since 2009 and the lowest. And I’ve been doing this for 40 years. I’ve never seen a start to build like this,” Clark said.
The average rent for Aegis is around $12,000 a month, but includes utility, transportation, food, activities and various levels of care. Clark said most residents are funding partially by using revenue from the sale of homes, which has been dramatically valued over the past five years.
He said higher interest rates are a major obstacle to new developments.
“We have six buildings waiting to be refinanced. In our 28-year history, we have never had more than two. We have six, and we are soon seven, and everything is a floating debt. So it’s a catastrophic issue for the industry.
Investor interest
Harrison Street is an alternative real estate investment management company that manages $55 billion in assets. A company spokesperson said its U.S. core senior housing strategy rose more than 30% in net operating profit for the same location last year. Harris Street argues that this could be the strongest entry point for alternative real estate investments in its 20-year history, due to the limited supply and durability.
“Frankly, over the last 20 years, we cannot identify another period of time that we are more excited about the current setup within the sector,” said Mike Gordon, global CIO at Harrison Street, who invests in independent supportive living segments and memory care.
Gordon said it was resolved primarily when serious uncertainty in the first few years of the pandemic – when there was a horror story of infection and death in senior living facilities. He said that more seniors live in these communities now than they live in before Covid.
Harrison Street won roughly 20 senior communities from 2020 to 2021 at the start of the pandemic, where there was virtually no liquidity in the sector. Over the past few years, increasing demand and tight supply have led to an increase in average annual rents across the sector increasing by nearly 5%, with nearly single digits in certain markets, according to Harrison Street.
Despite the overall high interest rates, Gordon said private investors have new benefits in the sector thanks to its strong rent growth.
“What we’re looking at now is a really quick return of liquidity to the sector,” Gordon said.
