Properties Perspectives

How to Invest in Senior Housing Real Estate

In this article, we will provide an overview of the senior housing asset class, highlight recent changes in use and conclude with thoughts on how investors can use this information to make informed investment decisions.

by Ian Formigle
September 09, 2016 · 7 min read

Senior housing is a niche property type that has moved into the mainstream of commercial real estate investing in recent years. Both institutional and private investors have been expanding into senior housing for a variety of reasons. Chief among them is the powerful demographic trend of an aging baby boomer population.

In addition, the recent economic recession provided further evidence that senior housing tends to be a more resilient real estate property type that doesn’t experience the same level of occupancy swings as other asset classes during economic downturns. Heated competition in traditional multifamily assets also has benefited senior housing as some investors have branched out into alternative housing investments.

Combined, all of these factors are fueling investor demand. The total size of the senior housing and care investment property market is estimated to be between $250 billion and $270 billion, according to the National Investment Center for the Seniors Housing & Care Industry (NIC). The non-profit group also estimates that the senior housing market in the U.S. encompasses roughly 22,000 properties and 2.9 million units/beds, including those market-rate properties with at least 25 units/beds.

In this article, we will provide an asset class overview, highlight recent changes in use and conclude with thoughts on how investors can use this information to make informed investment decisions.

Asset Class Overview 

Senior housing properties aim to provide both housing and services to seniors. The three main categories of senior housing include independent living, assisted living and skilled nursing facilities. Memory care is another specialized type of care that may be included as its own separate category or as a subset within assisted living. The NIC provides a detailed description of the different property types, as well as a variety of research and resources for investors, owners and operators.

Independent Living: Designed for seniors who require little or no assistance. These properties often cater to residents who are 55+ with a variety of on-site amenities and social programming. Fine dining services may be offered with custom-designed meal packages. These properties generally cater to healthy, active seniors with an emphasis on hospitality-style services and features. A variety of apartment sizes are available from studios to large two bedrooms.

Assisted Living: These licensed facilities combine housing with a variety of personal support services and healthcare assistance. Residents are not fully independent, and either want or need extra services related to medical care, or help with everyday needs such as transportation, meals and laundry.

Memory care: These long-term care properties serve residents with memory impairment, primarily dementia and Alzheimer’s, that makes it unsafe for them to continue to live at home or with a family member. Also called special care units (SCUs), memory care properties often provide 24-hour supervised care within a separate wing or floor of an assisted living facility.

Skilled Nursing: Properties are generally licensed and provide 24-hour skilled care for chronic and short-term conditions that require more intensive or specialized medical and nursing care. Memory Care Rehab centers are another subset within this category that provides healthcare services to both senior and non-senior who are in need of a high level of care on a short-term basis, such as during recovery from a major surgery or injury.

Campuses: Senior properties can be configured as stand-alone or adjoining facilities, as well as campus-style continuing care retirement communities (CCRCs). CCRCs offer a tiered approach to the aging process as they allow residents to move from one type of facility to another in the same location as their level of care needs change. Those campuses also are ideal for spouses or siblings who want to live close together but have different care needs.

Demand Drivers 

The demand for senior housing is influenced by two key factors. One is needs-based. Some seniors have a need for assistance as they age. That demand for personal and healthcare-related services drives demand for assisted living, memory care, and nursing care. A second factor is a simple lifestyle choice. Some seniors choose to live in 55+ communities for the social benefits of living near their peers, as well as more convenience and lower maintenance associated with an apartment versus a home and amenities such as meal plans. Based on 2010 population estimates, over 20% of the 12 million households headed by persons at least 75 years old reside in senior housing and care properties, according to the NIC.

Demographics: One of the factors that has attracted capital to the senior housing sector is its favorable demographics. As of 2016, 15% of the U.S. population (49 million people) was age 65 or older, and by 2030, 21% of the population (74 million people) will be 65+. Those boomers are having both a direct and indirect impact on senior housing properties. Baby boomers are actively moving into 55+ independent living properties. However, the typical age for seniors entering assisted living facilities these days is 80, and the first baby boomers do not turn 80 until 2026. Therefore, boomers won’t have a significant direct impact on demand for assisted living and skilled nursing facilities for another decade. Boomers are a big influencer of demand for assisted living and skilled nursing facilities as they are the children of today’s residents.

Memory care: Baby boomers also will drive demand for more specialized memory care facilities, which can affect seniors at earlier ages than other aging needs. Of the 5.4 million Americans with Alzheimer’s, an estimated 5.2 million people are age 65 and older, and approximately 200,000 individuals are under age 65 with younger-onset Alzheimer’s, according to the Alzheimer’s Association. Unless there is a medical breakthrough, the number of people age 65 and older with Alzheimer’s disease could nearly triple to a projected 13.8 million by 2050.

Geographic concentration: The demand for senior housing properties is widespread across the country from major metros to very small tertiary markets. However, a large population base – and especially a concentration of aging seniors – will drive more demand for senior housing properties. Notably, there is a greater concentration of senior living in three key states – California, Florida and New York.

Changes in Use 

Across all types of senior housing, one of the most notable changes over the past two decades has been a continual shift away from institutional style facilities. Residents – and their children who are making those housing decisions – have higher expectations for care, which has influenced the level of services delivered by senior housing operators as well as the quality of the physical environment. As such, all types of senior housing properties are finding that they have to step-up their game in order to compete for residents.

Upgrading image: Developers are thinking strategically about their customer base, as well as the decision-makers for those customers. For example, what locations are most convenient for those children to stop and visit mom or dad, and what types of facilities do they want to choose for their parents? What was acceptable in the 1980s is not acceptable today. Facilities are aimed at keeping seniors happy and engaged, giving them a better quality of life and also prolonging their life. Today’s properties offer a variety of on-site amenities, such as nail salons, nature trails, and chef-run restaurants.

Thoughtful design: Facility designs are being re-engineered with more inviting atmospheres that are both appealing and therapeutic to residents. For example, select memory care facilities are incorporating retro environments, such as a 1950’s soda fountain. Studies have shown that seniors who suffer from dementia are stimulated by these simulated environments and begin to behave more like the youthful version of themselves that coincide with the period of the environment. Operators are also infusing biophilic designs and introducing natural elements, such as living plant walls and raw-edged wooden tables to add warmth to a space by bringing nature indoors. Incorporating nature in this way has shown to positively affect those in the space by reducing stress and improving cognitive performance, emotions and mood.

Emphasis on Wellness: The concept of preventative care has finally made its way into the operational of modern senior housing facilities. Many communities are choosing to add resort-caliber spas and fitness rooms, residents are seeking and able to utilize such amenities.

Technology: One of the most prolific changes in senior housing facilities is the adoption of technology. Tech implementation begins with simple items such as Wifi to Wii games that can help keep residents engaged and active. State-of-the-art tech also is increasingly used to monitor residents for health and safety purposes and substantiate the level of care residents are receiving for their family members. For example, caregivers in modern facilities are now often equipped with smartphone apps to log and input data live during resident visits rather than relying on outmoded documentation procedures. In addition, surveillance systems such as live webcams enable the children of residents to log into secure portals and “virtually” check in on their parent.

Synthesizing the Information

Senior housing has some distinct differences compared to other real estate property types. For starters, it is one of three asset classes (the other two being hotels and self-storage) that are essentially operating businesses attached to real estate. For this reason, investors should investigate the manager or operator just as stringently as the fundamentals of the underlying real estate when contemplating a senior housing investment. By analyzing a deal against the backdrop of local demographics and with attention to items such as modern design and a progressive operating strategy, investors can gain better insight into the probability of a particular investment meeting or exceeding its targeted goals.

Second, there are different payment options that include private pay (residents paying out-of-pocket), and/or payment through other means such as long-term care insurance, Medicare, Medicaid or veteran’s benefits. Some of the public programs can be more sensitive to limits on reimbursement or legislation that may affect billing processes and payments. Therefore, properties whose business models are oriented predominantly or exclusively towards private pay are far less vulnerable to payment terms risk and bureaucratic complexities.

For investors, identifying a competitive senior housing investment offering begins by confirming the following attributes:

  1. A primary market with robust demand

  2. An experienced and sophisticated operator

  3. An operating strategy that possesses a modern approach; and

  4. An appealing facility that will attract residents

If those four key elements are in place, then investors, subject to review of supporting materials,  are likely on their way to identifying a competitive property.  Investors can find a variety of senior housing real estate offerings across different categories on the CrowdStreet Marketplace.