A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox.
Senior living has long been a somewhat under-the-radar real estate play, with a somewhat unappealing reputation. But it is on the edge of a boom — a baby boom to be exact.
More than 4 million boomers will hit 80 in the next five years, and occupancy at both active adult and assisted living communities is already rising fast. This comes as annual inventory growth in senior housing just dropped below 1%, the first time that’s happened since the National Investment Center for Seniors Housing and Care began tracking the metric in 2006.
Ventas, a senior living real estate investment trust with a $31 billion market cap, is betting big on what CEO Deb Cafaro calls the longevity economy.
“We’re buying billions of dollars a year in senior living, and we’re seeing returns in the sevens going in, with low to mid-teens, unlevered IRRs [internal rates of return], so there’s significant growth in assets, and we’re buying below replacement costs,” said Cafaro, who has been at the helm of the company for over 25 years. “I’ve never seen that combination of investment characteristics in my long career in real estate, and so we’re fully taking advantage of all of that.”
Cafaro said there is 28% projected growth in the senior living demand pool over the next five years. She called the demand tailwinds “incredibly strong and durable.”
“Think about 2000 in the real estate investment trust business — office was over 20% of the overall REIT pie, and health care was 2%. Now when you look at the pie, office is 5%, and what is it now? It’s health care, senior living. It’s data centers. It’s cell towers. Why? Because that’s where the demand is,” she said.
Cafaro said Ventas, which purchases properties but doesn’t develop them, benefits from the deep lack of supply in the senior living sector, from active adult to assisted living to memory care facilities.
The Sunrise of Lincoln Park senior living community, owned by Ventas, in Chicago, Illinois.
Courtesy of Ventas
“As an owner with one of the largest footprints of senior housing, of existing stock in the U.S., we’re benefited by the higher cost of development, because we have an installed base and we’re acquiring assets actually at below replacement cost, and, right now, that’s part of our strategy,” Cafaro said. “We feel really good about our base of 850 senior living communities, where occupancies are increasing. And we also feel good about the multibillions of dollars we’re investing every year in existing assets,”
Why no supply?
Aegis Living is a developer and operator of senior living facilities in Washington, California and Nevada. The massive supply-demand imbalance weighs heavily on its founder and CEO, Dwayne Clark.
“There’s a problem brewing, and the only metaphor I can think of, it’s like putting a party balloon on the end of a fire hose and watching it increase with great velocity. Velocity without being able to do anything until it pops,” Clark said.
According to NIC data, there will be just about 4,000 new senior living units developed this year and next year, but demand growth would necessitate 100,000 new beds each year through 2040.
“It’s the lowest amount of units we’ve seen since 2009, the lowest. And, again, I’ve done this for 40 years. I’ve never seen such a lack of construction starts,” Clark said.
Average rents at Aegis are around $12,000 a month, but that includes utilities, transportation, food, activities and differing levels of care. Clark said most residents are covering costs in part by using the proceeds from the sale of their homes, which have appreciated dramatically in the past five years.
Higher interest rates, he said, are the primary roadblock to new development.
“We have six buildings waiting to get refinanced. We never, in our 28-year history, have had more than two. We’ve got six, and soon to be seven, and it’s all on floating debt. So that is a catastrophic problem for the industry. And again, we’re not catching up with the demand,” he added.
Investor interest
Harrison Street is an alternative real estate investment management firm with $55 billion in assets under management. Its U.S. Core Senior Housing strategy posted a more than 30% increase in same-location net operating income last year, according to a company spokesperson. Harris Street has maintained that with new supply constrained and demand durable, this could be the strongest entry point for alternative real estate investment in its 20-year history.
“Frankly, over the course of the past 20 years, I can’t identify another period where we were more excited about the current setup within the sector,” said Mike Gordon, global CIO of Harrison Street, which invests in the independent and assisted living segments, as well as memory care.
Gordon said severe uncertainty in the first years of the pandemic — when there were horror stories of infections and fatalities in senior living facilities — has largely been resolved. He now said there are more seniors living in these communities than there were pre-Covid.
Harrison Street acquired about 20 senior communities during 2020-2021, at the start of the pandemic, when there was virtually no liquidity in the sector. Over the past few years, growing demand and tight supply have resulted in annual average rent increase of nearly 5% across the sector and high single digits in certain markets, according to Harrison Street.
Despite high interest rates overall, Gordon said private investors have new interest in the sector, thanks to that strong rent growth.
“What we’re seeing right now is a real quick return of liquidity into the sector,” Gordon said.
