Wealth Mgmnt

The Economics of Senior Housing Investing

If you’ve ever wondered about living in a 55+ community like Jimmy Buffett’s Margaritaville you’re not alone. Buffett has parlayed his success in creating tropical songs for the masses stuck in traffic jams in the snow to warm weathered permanent residences across Florida and the south. But it doesn’t stop there. Those of the baby boomer generation who feel the need to expatriate can also find Buffett inspired resorts in Belize and the Bahamas. The demographics are obvious and have been predicted for quite some time. Americans are starting to live longer, more active lives than past generations. As such, the range of senior housing and amenity offerings has evolved to better match these lifestyle preferences. The metrics behind senior housing support the optimism in this sector of the real estate industry. Take a look at some of the following projections:

  • In 2021, there are an estimated 23 million Americans over the age of 75 and 8.9 million over 85, a common move-in age of a resident to seniors housing.
  • It’s not until 2031 that the oldest baby boomer will have turned 85—effectively opening the proverbial floodgates for senior housing investments.
  • 2 million Americans will live in senior care communities by 2030, doubling from 2016.
  • By 2050, it is estimated that over a fifth of the population in the United States will be 65 years or older, compared to only 15.6 percent today.

One would guess that institutional investing and the smart money would be quick to the chase in profiting from this growth sector. Data across the board from adult properties suggests that they have generally been filled with residents, with most performing very well during the pandemic. According to Cody Tremper, managing director for JLL Capital Markets, “We are seeing assets in core locations achieving pricing levels that have never been hit before for this product type.” The spectrum of senior housing options ranges from age-restricted multifamily all the way to nursing homes and hospitals, depending on the acuity of care required.

Although there are several different types of senior housing, the general economic principles listed above apply to all. The demand side of the equation, as pointed out in the previously mentioned data is solid. However, the supply side of the equation is much more tenuous. Senior housing is an operating intensive business that is heavily regulated, making the operator’s experience of utmost importance. While primarily categorized as a real estate investment, senior housing also has an operational component that is critically important to its success. As such, the investment is not for the faint of heart. Senior housing is a heavily regulated industry, and as a result, demands a high-quality operator who understands the nuances of these regulations in order to remain in compliance. This is particularly compounded in today’s economic environment where we find ourselves in a very tight labor market. Staff retention and training in this sector is extremely important to not only creating a value for shareholders, but also for providing a caring environment that is appealing for its customers. This is the due diligence that must be done in great detail before any investment can be made in this space.

On the demand side, the composition of the local demographics is key to finding long term success. One would think that an area that has an aging population might be an obvious spot to develop a property. While this might be true, it is more nuanced that that. Statistics show us that the demand for senior housing is primarily driven by the location of the seniors’ adult children. As such, it is more difficult to predict a desirable location, but utilizing the following demographic metrics will be of assistance.

  • Number and growth of seniors in the area
  • Median household income of seniors living independently
  • Median household income of adult children
  • Local housing values, as this tends to be a good proxy for wealth

Investors today are looking for hedges or alternative investments to add to their portfolio that are not correlated to the stock market. Senior housing is one of those asset classes. A key component of the senior housing market’s success is its lack of reliance on an economic or real estate environment. Senior housing has been the number one performing commercial real estate sector for the last ten years. This is basically a supply and demand issue, where the large baby boomer population continues to create the need for properties in this space. However, the supply side has yet to catch up. Units under construction began a significant decline in 2008 and continued to fall through 2011, with only modest growth through 2014. From 2014 through 2019 units increased dramatically. Like all property types, senior housing has its own business cycle. However, the demand for senior housing is much less affected by the rise and fall in employment and the expansion and contraction of GNP. 

With Americans living longer than ever before, there’s no reason to believe that interest in senior housing will slow down. Through various REIT’s, mutual funds, private equity and other vehicles, you can have access to the potential profits that this sector holds.


Wealth Mgmnt