Yes, there are about 55 million senior citizens (ages 65 and over) living in the United States, with this number expected to rise to more than 85 million by 2050. Yes, roughly between 5 percent and 10 percent of adults aged 65 or older require daily medical assistance or are receiving government financial aid, but what about the rest?
Over the past two years, much of the dialogue related to the shortage of senior housing has focused on two segments of the population: the less healthy and the less affluent. But, according to a study published in JAMA Internal Medicine, around half of seniors ages 65 and older reported their health as excellent or very good; yet many in this population do not want to own their own homes anymore. So, where do they live? If you know a thing or two about private-pay senior housing, then you are probably familiar with housing options such as independent living, assisted living, skilled nursing and memory care. These forms of senior housing have attracted capital and resident attention for at least the past several decades. But there is something exciting taking hold within the senior housing market — it’s called “active adult living” (AAL).
WHERE IT FITS IN
AAL sits in the gray area between traditional multifamily housing and independent living. It doesn’t really compete with either product, as the alternative to AAL tends to be seniors who are choosing to stay in their homes. The AAL apartment renter is resistant to conventional senior living and has no interest in living with a bunch of old people. They are active, healthy and don’t need a meal plan. They want to enjoy their active years in an environment that is highly amenitized, supports their interests and offers a community ambience, conducive to building and sustaining new friendships. They just don’t want to deal with maintenance and taking care of a house anymore. They’ve got things to do, places to go.
Active adult living is growing in popularity and has generated a lot of investor buzz. In CBRE’s U.S. Seniors Housing & Care Investor Survey, 31 percent of respondents voted AAL as senior housing’s biggest opportunity for investment interest, receiving the highest percentage of votes. Interestingly, it is a term that is still without agreement as to a universal definition. In the absence of consensus, we will call it a niche senior housing product that is still working out its kinks. What we do know is that, at their core, AAL communities are highly amenitized rental apartment communities for healthy seniors, typically at least 55 years of age.
Beyond our simple definition, we can also chip away at what it covers by looking at what’s driving demand. The growing demand for AAL communities is driven by similar motivations that drove millennial apartment demand over the past decade — a desire to live in a walkable, amenity-rich, transit-oriented location that is close to retail, dining and entertainment. Not surprisingly, these communities have all kinds of amenities, running the gamut from 24-hour onsite staff, recreational facilities and social activity programming by professional staff, grounds maintenance, transportation services, to home maintenance (but no housekeeping).
An important and distinguishing characteristic of these communities is the programming and scheduled activities, including book clubs, exercise classes, group hikes and yoga classes, to name a few. It is called active adult living for a reason, because the programming plan is set with that purpose in mind. Cool social gathering places are also important; movies theaters and, interestingly, gym access rank high, too. Keep an eye out for an onsite beauty and barber shop, and dining/bistro lounges, too. You get the picture.
AAL INVESTOR ECONOMICS
Getting the right amenities package, apartment finishes, staffing and location combined with matched demographics presents many challenges. Defining the parameters is no easy task. Even if an investor gets that right, the next challenge is how to brand it, price it and iron out key metrics to measure performance. Seniors control the vast majority of the wealth in the United States but are typically cautious with their spending, and are uncomfortable paying for add-ons they don’t really need. Then there is the issue that seniors aren’t homogenous. A 55-year-old senior has very different interests than a 75-year-old senior, and so on. How do you solve for both? Seniors want a living environment that can adapt to their changing wants and needs. One way to address that is to offer a menu of amenities and price accordingly. But what about the basic rent starting point? Should it be a premium or discount to multifamily apartments or independent living apartments? Industry feedback we have collected has AAL apartment rents largely trending higher by anywhere between 10 percent to 30 percent relative to traditional multifamily rents, and a significant premium on rent for typical independent-living communities. We did some checking on a few websites, and what we found was AAL apartments were going for anywhere between $1,200 and $4,750 per month.
What about the property-level P&L? If coming at AAL from a multifamily investor perspective, the lease pro-formas look a lot different. AAL communities take a lot longer to lease up, but an operator can charge more, and the retention is higher, with the average resident remaining for six to eight years on average, while traditional assisted living sees only an average of two years. A large player in the space, The Carlyle Group, has reiterated this message, saying that for its product, the average lengths of stay are more than two times the average of independent living and at profit margins that outperform traditional senior housing. It argues that having a stable, consistent tenant base allows investors to push rent growth, which translates to higher, more consistent returns. The Carlyle Group works with several partners in the space, including Greystar on its Overture brand. Greystar manages 56 AAL communities with more than 10,700 apartments, and has recently launched a middle-
market brand focused on a lower price point and has adjusted amenities accordingly.
Greystar and Carlyle aren’t the only institutions focused on this new niche, as we continue to see more developers and investors moving into this growing space. Just in the past few weeks, for example, Avenue Development announced the launch of its new AAL company, Viva Bene, focused exclusively on this concept. Bain Capital Real Estate closed its $3 billion fund at the end of 2021 that includes active adult living as a sub-strategy. Welltower announced a joint venture in the United Kingdom focused on the “next generation” of senior housing, with AAL being a top priority. As capital is beginning to flow into AAL, we only see an increase in allocation and attention on this niche going forward.
From a pricing perspective, AAL cap rates tend to be all over the board, but it appears they trend lower than senior housing counterparts but on-par or higher than multifamily cap rates. This presents investors with an interesting question: Do they view AAL as a niche falling in with multifamily or senior housing? That answer doesn’t seem to be quite clear if cap rate trends are supposed to be a guide. Clarity of product type may be a driving factor for investors in recognizing the opportunity for capital allocation.
WHERE THIS LEAVES US
We know there is a senior housing shortage, and we know that seniors aren’t that much different from millennials in many respects. We also know that this product is on the move and growing in investor attention and focus. We believe AAL is not just a way of doing old things new ways, but is a new, new thing. Based on what we have seen from these community offerings so far, when can we move in?
Deborah Smith is co-founder and CEO of The CenterCap Group. Read the original version of this article on the CCG website. Click here.