A new report, “The Five-Year Senior Housing Development Forecast” from Plante Moran Living Forward, predicts some challenging times ahead in the senior housing sector, but also opportunity for astute investors who are poised to react quickly.
During the economic recovery that is now in its 10th year, construction of senior housing has surged – to the point of oversaturation in a number of markets. In fact, citing the National Investment Center for Seniors Housing & Care (NIC), the report notes that around 20% of the current U.S. senior housing inventory came to market within the last five years.
That enthusiasm was fueled by visions of the “Silver Tsunami,” or wave of Baby Boomers approaching the time when they’ll be opting for independent living facilities or will need assisted living solutions.
Short-Term Challenges Ahead
But we’re still years away from feeling the full force of that tsunami. The average age of a Baby Boomer (the generation born between 1946 and 1964) is 72 – still more than a decade away from the average age (84) of those traditionally moving into independent and assisted living communities.
Here’s a telling statistic:
According to the U.S. Census Bureau, the number of Americans age 85 and older is expected to more than double between 2020 and 2040 (from 6,693 to 14,115).
The report offers three predictions of what will drive the senior housing market in the near term.
Prediction No. 1: New construction growth will slow.
Because of the current abundant inventory of senior housing facilities, a slowdown is foreseen, especially in the next five years. Further, the industry faces the hurdle of filling all the new facilities, as the “younger” Boomers aren’t yet ready to be counted among their tenants.
There’s also the wild card of rising interest rates, which could raise construction costs, tighten the labor market and delay new units coming online.
Investors are urged to exercise caution when it comes to new facilities, due to the possibility of subpar construction by overzealous developers or those not well acquainted with the senior housing sector.
“Not all new product is good product,” the report notes, continuing “…Buildings that were constructed in haste or with low-quality materials will likely require a great deal of new capital investment within five to 10 years.”
A wave of new, inexperienced operators of these properties has appeared over the last five years, prompting concern about the long-term viability of many properties. And even experienced operators may not be able to keep a sub-par property afloat, regardless of the amount of “bells and whistles” the site displays.
Prediction No. 2: Cloudy skies will continue—short-term.
Some senior living communities likely will go belly-up in the next three years, the report predicts, due to operator inexperience, along with financial pressures.
Nevertheless, the authors say, the situation “will present great opportunities for experienced owners and astute investors to grow.”
They cite the 39th annual “Emerging Trends in Real Estate” report from the Urban Land Institute and PricewaterhouseCoopers, which identified senior housing as the residential property type with the best prospects for both development and investment in 2018 and beyond.
Keeping a sharp eye out for opportunity is only the first step, though. Investors also must be able to pounce upon their opportunities quickly.
Prediction No. 3: A repositioning boom is in store.
Most of the future growth in senior housing likely will come from repositioning efforts rather than new construction, considering the already-saturated state of many markets.
It’s important to research the market to determine what consumers want and to match the facilities’ services to those needs.
One immediate concern is the overage of skilled nursing beds within the existing senior housing inventory. NIC tracks 1.8 million senior housing units (beds) in the U.S. and says nearly half (49%) are skilled nursing units. Yet the bulk of consumers are still years away from needing that type of housing.
In response, the number of skilled nursing beds has been declining each year since 2008 (with the exception of 2010 and 2013), the report notes.
Construction and renovation costs always should be factored into the equation when considering a repositioning strategy to ensure the project is economically viable.
The Plante Moran report concludes with this encouragement:
Despite any short-term difficulties in the senior housing sector, “the long game appears to have wind at its back. … There are ample opportunities for senior living owners and operators to succeed in the meantime and prepare for the aging wave ahead.”