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.