The Odd Story Of Finance In The Senior Living Sector

Sunrise Senior Living - Church Road, Edgbaston...
Sunrise Senior Living (Photo credit: Ell Brown)

The senior living sector is a major growth area in commercial real estate. The reasons for this boil down to classic supply and demand driven by demographics. Longer life expectancy in the United States mean steady growth in age cohorts that move into senior living facilities.   The over-85 segment of the population is growing at three times the rest of the population.  In 25 years, it is set to double. Further, a great number of existing facilities are older product, so new unit development is being spurred in most markets.

REITS stepping up

This population growth meeting a 7% penetration rate  – the rate at which seniors become residents in senior living facilities – means the requirement over the next 15 years is to build 375,000 new units of assisted living and senior living facilities.  This requirement comes with a $57 billion capital cost.  Yet the investment dollars for this sector have not come from mainstream sources.  Financing of projects and acquiring equity has until recently been largely the domain of local banks, producing a highly fragmented and some would say eccentric financing picture.  Only recently has the REIT industry stepped up its acquisitions in the senior living space.  Speaking at the recent Real Estate Journal Senior Living Conference in Chicago, Manisha Bathija, Senior Investment Officer of Ventas, a REIT working the senior living space, said the portfolio she leads has picked up $18 billion in senior living property acquisitions the last 10  years and expects to continue the trend.

REITs are only one of the classic capital sources in our industry.  What about pension funds and insurance companies?  Here’s where it gets odd, and suggests a greater change.

The Missing Usual Suspects

Speaking at the conference, Jacob Gehl, VP Investments of MArcus & Millichap pointed out a surprising observation: Even though insurance giants once financed this space decades ago, in his experience, insurance companies and pension funds today “don’t like to invest in anything with a bed in it”.   Why the shyness around senior living and multifamily?  Because one aspect of ownership of such properties is evictions, and pensions and insurance companies are in the business of paying out to millions of beneficiaries.  There is a perception of a potential public relations disaster for a pension who is on one hand financially supporting a pensioner, and on the other hand, kicking that pensioner — their own beneficiary — out of his or her apartment.  Therein lies an institutional bias, one that may take some work to overcome.

Operations vs. Equity

Similar to hospitality properties of all kinds, the business of senior living property ownership is a mix of equity and operations.  It’s operations that drive performance, particularly in properties where cost controls and rent caps associated with government affordability programs are part of the picture.  If there was a theme at the conference, it was a reverence for skilled operators of senior living facilities, as they hold the key to performance.

 

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19 Comments

  • Maria Minico Hayes

    December 10, 2012

    As a Realtor who works in both the commercial and residential sectors, I am finding that a larger and larger portion of my clients are over 55. There are many ways I am learning to enhance my knowledge of what I can do for this group including becoming involved in volunteer work, subscribing to Retirement SourceBook and working with local builders and investors on determining how to best compliment the needs of this target market.

    Reply
  • Lisa Verkuilen

    December 10, 2012

    The other problem with Senior housing stems from the problem with Medicaid as well. The place where my father was, suddenly decided to become a “private pay” facility and was going to relocate the Medicaid patients to other facilities. This caused hardship on the families and real trauma and disorientation for the patients. I hope that these problems can be resolved in the next few years with changes in health care.

    Reply
  • Donald Harkins

    December 10, 2012

    I bought some OHI reit shares a few months ago, and it’s great! Thanks for the article.

    Reply
  • Sherry Fields

    December 10, 2012

    Working in Real Estate in Montana where we have one of the highest per capita senior populations, we have seen communities come together to assist seniors to stay in their homes longer. They formed a lending library – not for books – but for tools and then had a volunteer crew that cleaned gutters, changed storm windows, painted and generally refurbished older homes. It brought the community together in ways no one ever dreamed about. Developers and investors started buying some of the homes and rennovating or replacing them. A food co-operative was formed. Neighborhood pride was re-established and from a real estate perspective – the value of homes in the neighborhood has increased – even in this challenging market.

    Reply
  • Fonda Glenn

    December 10, 2012

    I am going to start the coming year off by signing up to do some type of volunteer work for the 55+ group.

    Reply
  • Gregory D Schreiber

    December 10, 2012

    As the average life expectancy in the US increases, this will have a greater impact on housing issues. In my area, about half of what is being built by Toll Brothers is geared towards senior buyers. I’m sure other builders are watching carefully.

    Reply
  • John Burkhimer

    December 10, 2012

    I look forward to seeing more retired assisted living operations on the Outer Banks of North Carolina. It’s a great place to live!

    Reply
  • Susan Phelps

    December 10, 2012

    I couldn’t agree more with the last paragraph about the need for highly competent managers of assisted living facilities of every type. I was a consultant for 13 years for long-term care and assisted living facilities. It was usually apparent in a short period of time if a manager was not doing a good job. Without an effective skilled leader the staff lose interest and enthusiasm for their work and the care provided goes downhill fast.
    In Sarasota, Florida our senior population is a higher percentage than in most cities of similar size. We are seeing new facilities built to cater to every level of care.

    Reply
  • Delores O'Mara

    December 10, 2012

    I have seen a model in Canada where several seniors buy a house together with a health care professional, usually a nurse. The nurse pays less but as a resident lives there and provides basic services to the other residents. This provides an economic benefit for an aging health care professional and enough service to keep some older persons in community housing for much longer.

    I would love to see more models for housing as people age. Assisted living is not for everyone.

    Reply
  • Gini Denninger

    December 11, 2012

    Elder housing appears to be gaining momentum. I see this housing trend caters ( for the most part) to the upper middle class and wealthier client at this point in time, I see a need for this type of housing for those less flush. Will be watching the trend as it developers further

    Reply
  • Jamie Smith

    December 11, 2012

    The greater Knoxville, TN area has seen a big movement in senior housing. Seniors have found this east Tennessee region to be an excellent place to retie and live.

    Reply
  • Susan Saraceno

    December 13, 2012

    As a 55+ person living in an affordable 55+ community in Gainesville, FL, I see more and more of my 90+ neighbors aging in their homes. However, even with a minor ailment, most of them are destined to long-term care, rehab, or assisted living facilities. It is very difficult for most of them to afford the extra funds needed for adequate care when they have been injured or are sick. Many of them have children in the area, but those children either can’t, or won’t, spend the amount of time it takes to care for an ailing parent. I loved the idea of co-housing with a nurse. Maybe some of our 55+ communities need to think about offering low cost loans or discounted housing to caregivers willing to work within that community.

    Reply
  • Rock Werdt

    December 14, 2012

    As a new designee located in Florida; I will be able to assist our respected Senior community in their present and future housing needs. Thank you for the opportunity to serve you. (772) 370-2720.

    Reply
  • Randy Templeman

    December 14, 2012

    While the issue of senior housing is one that needs to be addressed from many perspectives, I cannot help but wonder what the impact would be if “age” was a protected class under the Federal Fair Housing Act? Since age may be a protected class in some states, it could have an impact on the availability of construction and purchase financing, inventory and how senior housing is handled across the country. Throw in the climate differences and population trends from the rust belt to sun belt states over the last several decades and it comes as no surprise that the financing of senior housing is so fragmented and fluctuant throughout our nation.

    Reply
  • Brandon Lau

    December 14, 2012

    Thanks for the article. We see the same trend in Hawaii. Seems the warm weather is quite attractive.

    Reply
  • Steve Andrews

    December 28, 2012

    Thank you for the article. It is interesting to see what is happening in that community. I had no idea that the real estate for this was so popular.
    Steve @ Senior Living Denver

    Reply
  • The representation of a odd story as it appears in this blogs has provided a new wind of fresh air in the matter. Thanks for sharing. Great job Wayne.

    Reply
  • flat fee realtor

    October 17, 2013

    Now I am going to do my breakfast, later than having my
    breakfast coming again to read additional news.

    Reply
  • Jan Parrish

    October 17, 2013

    Interesting article. Thanks for the information!

    Reply

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