In real estate investing, demographics are part of the foundation for “location, location, location”. If the demographics and population growth are not there to support your property, it will rapidly lose profitability.
In senior housing, the wave of demand from aging baby boomers acts as a solid base to help improve your profitability. As the population ages, the demand for high-quality senior living options is continuing to skyrocket, creating an opportunity for investors to enter a growing and profitable sector.
Growing Demand Due to Demographic Shifts
One of the primary drivers of senior housing demand is the aging Baby Boomer population.
- Roughly 73 million Baby Boomers in the U.S. are stepping into their senior years in the current decade
- Approximately 10,000 individuals reach 65 years of age daily
- By 2030, all Baby Boomers born between 1946 and 1964 will have turned 65, making up around a fifth of the U.S. population
- The U.S. Census Bureau estimates that by 2034, the number of adults aged 65 and older will outnumber children under 18 for the first time in history
As this demographic ages, there will be an increasing need for housing options that provide medical care, social engagement, and a supportive living environment.
This high demand, paired with limited current supply, positions senior housing as a growth market within real estate.
Need for More Senior Housing
According to research by NIC, the National Investment Center for Seniors Housing & Care, the demand is expected to far outweigh new supply in the short term, which will put upward pressure on existing supply as shown in the graph below.
Variety of Investment Types Within Senior Housing
Senior housing encompasses a wide range of options that cater to different needs and budgets, allowing investors to diversify within the sector.
The primary categories include:
- Active Adult
- Independent Living
- Assisted Living
- Memory Care
- Skilled Nursing Facilities
Each offers unique benefits and serves distinct segments of the senior population. For example, independent living attracts older adults seeking community living without extensive medical care, while memory care and skilled nursing facilities provide specialized support for those with health challenges. By selecting specific types within senior housing, investors can align their investments with their risk tolerance and expected returns.
Benefits of Investing in Senior Housing
1. Recession-Resistant Nature of Senior Housing
Senior housing has proven to be more resilient than other real estate types during economic downturns. Unlike commercial real estate or multifamily housing, senior housing is often a necessity rather than a discretionary choice.
Older adults may require specialized care due to health concerns or limited mobility, making senior housing less susceptible to market volatility. This stability makes it particularly appealing for investors seeking consistent returns in uncertain economic conditions.
2. Strong Cash Flow Potential and Long-Term Growth
Senior housing investments often come with favorable cash flow potential due to growing occupancy rates, especially in areas with a high concentration of older adults. Rental income from senior housing properties can be substantial, as these properties generally charge higher monthly rents to cover the cost of care, staffing, and amenities.
Given the ongoing demand and rising costs of care, senior housing rents are also expected to appreciate over time, adding to the long-term return potential.
3. Attractive Financing Options
Investors in senior housing benefit from various financing options, including government programs that incentivize the development of affordable housing for seniors. Some financing options include:
Fannie Mae/Freddie Mac (GSEs)
Senior housing loan program offers 5-30 year terms and amortization of 30 years, fixed and variable rates, and up to 75% of LTV.
HUD
Terms range between 10-40 years, and LTVs of up to 80% for for-profit entities and 85% for nonprofit organizations.
SBA 504 Program
Affordable financing vehicle for those who want to improve, build, or acquire an assisted living facility. The SBA 504 program provides long-term, fixed-rate loans, and may require only a 10% down payment.
Conventional Financing
Generally, less favorable terms, but faster closing times.
State Tax Incentives or Grants
Many states encourage the development of affordable senior housing with programs to help provide funding, creating opportunities to reduce the capital required and improve overall investment profitability.
4. Return Metrics Can Match Buyer Risk Profile
When evaluating senior housing investments, investors can match their risk tolerance to the product type within the senior housing space. Active Adult will sell for CAP rates more in line with traditional multifamily investments, while skilled nursing will sell at a higher CAP rate, which is a reflection of the additional need for staffing and regulatory requirements.
Senior housing overall often has a higher CAP rate than traditional multifamily properties due to operational complexity and higher risk. Investors should compare CAP rates within senior housing subtypes to determine the expected return based on market conditions.
The chart below reflects the average range in CAP rates of the various senior living options, courtesy of CBRE survey respondents.
5. Occupancy Rates
The average occupancy rate was 86.5% in the third quarter of 2024, according to data released by the NIC. Before the COVID-19 pandemic, the occupancy rate was 87.1%. This decreased to a pandemic-related low of 77.8% and has been on the increase for 13 consecutive quarters to our current rate of 86.5%. This is almost back to a pre-pandemic occupancy and is expected to continue to rise.
Properties located in regions with aging populations or a limited supply of senior housing tend to have higher occupancy rates, which is a positive indicator for stable income generation.
Risks of Senior Housing
In addition to the risks commonly associated with real estate, senior housing has some unique challenges.
1. Regulatory Oversight
As we saw during the pandemic, legislative risk can present material headwinds to cash flow, occupancy, and expenses.
2. Labor Shortages & Cost
The ongoing broad labor shortage is also strongly reflected in the senior care industry, and the care needed for seniors may drive higher labor costs to retain staff.
3. Liability
The fact that healthcare services are incorporated into some sectors of senior housing also presents risks related to the care and well-being of residents. Lawsuits as a result of care or health are a risk that providers must consider.
Conclusion
Senior housing offers real estate investors a unique opportunity to tap into a resilient and growing market driven by demographic trends. With high demand, stable income potential, and diverse options for investment, senior housing is an appealing choice for investors seeking both stability and growth.
Many investors like to diversify their real estate holdings. We help to guide the risk profile of your investments, so that you can rest easy knowing your portfolio is well-allocated.
Sources
https://ipgsf.com/demographic-shift-active-adult-communities-thrive
The occupancy rate for the 31 NIC MAP Primary Markets rose 0.7 percentage points to 86.5% in the third quarter.
This marked the thirteenth consecutive quarter of occupancy gains, driven by resident demand for senior housing units outpacing the amount of new inventory arriving online.
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