Demographics are destiny. The longevity revolution. The silver tsunami. Baby boomers aging. They are popular phrases and ones that continue to influence broad-based investor interest in the senior housing asset class.
The reality is, however, that baby boomers (i.e., those born between 1946 and 1964, ages 53 to 71) are not today’s senior housing residents. Today’s residents are an earlier generation and part of either the Greatest Generation, born between 1901 and 1924 and currently 92 years or older, or of the Silent Generation, born between 1925 and 1945 and currently between the ages of 72 and 92. The move-in age to a senior housing property (either assisted living or independent living) is often older than 84. Baby boomers in general have another decade or longer before they become residents.
That said, baby boomers do wield influence on demand for senior housing because they are the adult children of today’s residents, often making the decisions for where their elderly parents will live. And importantly, based on birth rates in the 1930s that decelerated after the end of the Depression (the years in which today’s residents were born), the low point of the size of the 84-plus cohort is now behind us. Today, the 84-plus cohort comprises more than 8.3 million people, with an additional 1 million or more projected to be added annually for the foreseeable future until the baby boomers arrive in the cohort, adding more than 3 million per year.
If it is not yet the baby boomer bulge that is drawing investor interest to senior housing, what are the other compelling reasons driving private equity funds, public and private REITs, and other investors to look at this emerging commercial real estate sector?
Double-digit returns. The investment opportunities and return performance of the sector are no longer a secret. During the most recent recession, the sector performed well compared with other commercial real estate sectors, and this is increasingly acknowledged. First, rents generally stayed positive during the recession, and occupancies for assisted living properties did not suffer as much as other commercial property types because assisted living has a need-based, recession-resilient demand component to it. Additionally, investors who aligned themselves with strong operators made investment returns (composed of both appreciation and income returns) in excess of 11 percent, on average, over the past decade, according to NCREIF data. Moreover, these returns were relatively stable.
Greater liquidity, greater transparency. Growing transaction volumes have created greater liquidity in the sector, which in turn has made investors more comfortable knowing that multiple exit strategies are possible. Greater interest in the sector has also generated better understanding and heightened transparency of the senior housing asset type, with data related to pricing and transaction activity available through media coverage and Wall Street analysts’ commentaries as well as on public REITs’ websites.
Increasing business opportunities. More recently, the sector has garnered further investor interest because of emerging care coordination opportunities for aging seniors. The Affordable Care Act and changes in Medicare’s payments structure have changed the payor landscape. Alternative payment plans and networks — such as accountable care organizations, managed care organizations and bundled payments — are displacing fee-for-service payment plans in both Medicare and private health plans. Senior housing operators, as well as skilled nursing and post-acute providers, have new opportunities to become part of the emerging and rapidly growing care continuum.
Longevity, health and fewer caregivers. Indeed, people are living longer and, in so doing, creating additional care needs. The average life expectancy for a man born in 1900 was 52. By 2000, it was 82. So over the course of 100 years, 30 years of life expectancy was added due to advances in nutrition, medicine and lifestyle. The increase in longevity is not necessarily associated with greater health, however, and the incidence of co-morbidities or multiple chronic diseases in Americans is rising, ironically, because people are living longer and the likelihood of contracting a modern illness, such as cancer, diabetes or heart disease, rises with age. In fact, more than 90 percent of persons older than 85 are estimated to live with multiple chronic diseases.
The challenge will increasingly become how to care for these older and often more frail seniors. This is particularly challenging because there are fewer adult children to care for their elderly parents due again to demographics and the drop in birth rates experienced between the Silent Generation to the Baby Boomer generation. Women in the Greatest and Silent generations simply had more children than did women of the subsequent Baby Boomer and Millennial generations. As a result, there are currently seven adult children to care for their elderly parents, and by 2030, this ratio will drop to 4-1.
TOMORROW’S PROSPECTS AND INVESTMENT OPPORTUNITIES
The combined demographic factors of swelling ranks of older Americans, fewer adult caregivers, increased longevity and rising health needs create clear opportunities for investors. For those trying to get ahead of this demographic wave, or perhaps more appropriately called a demographic surge, now may be the time to consider investment in senior housing and care.
Public markets. For individuals seeking to invest in senior housing, most opportunities revolve around the public markets — either public REITs or public companies. But it is important to note that most of the public REITs do not solely invest in senior housing and often invest in a broader aggregation of healthcare, which may include medical offices, hospitals, skilled nursing facilities and life science buildings. (A list of these companies can be found on the accompanying table.)
Other opportunities require access. For large institutional investors, other options exist besides those listed in the table, including private equity funds, private REITs, and debt positions. In some rare instances, high-net-worth individuals can invest in private equity funds, but typically these opportunities are limited to “friends and family” and often require minimum investments of $1 million or more.
For high-net-worth individuals seeking to invest in senior housing, it is really a question of access. While not common, there may exist opportunities to participate in a syndicated co-investment opportunity within a private equity investment. Typically, private equity funds have clauses where key employees invest in the fund in a “meaningful” way. In some occasions, this co-investment may be syndicated out to non-employees who co-invest along with the employee capital.
In other instances, private wealth managers may create a private placement memorandum that is open to outside investors. While this is rare, it must still be properly vetted and conform with all relevant securities laws, and present an opportunity for smaller investors.
Finally, there is a longstanding precedent established that some individuals who wish to invest in senior housing actually create a business themselves to provide housing and care for seniors. This was the case for Sunrise Senior Living, when it was founded by Paul and Terry Klassen in 1981. It was also largely the case for Belmont Village Senior Living, founded by Patricia Will in 1997. In these instances, friends and family often provide some equity capital to the originating founders of these companies.
The bottom line, however, is that there are a number of opportunities for institutions to invest in senior housing. However, there are not myriad opportunities currently available for individuals to invest in this compelling asset class. This creates an enticing and interesting opportunity for the entrepreneur and capital aggregator to create new retail investment vehicles for the many private individual investors interested in this emerging sector.
Beth Burnham Mace is chief economist and director of capital markets outreach for the National Investment Center for Seniors Housing & Care.