Backed by a huge demographic push of aging baby boomers, the senior housing market has become a popular investment—not just in the healthcare realty sector, but in commercial real estate proper. And it’s for good reason. Research shows 100,000 units will need to be built every year through 2040 to keep up with rising demand. Add in the fact that senior housing is recession-resistant, and you’ve got what many investors would call a “no-brainer.”
In fact, senior housing has consistently outperformed all other asset classes in the sector for the past 10 years. But recently, concerns regarding overbuilding and increasing interest rates have surfaced among some investors. In 2016, occupancy rates declined more than a half percent from the previous year’s levels to 89.3 percent, leading to concerns that oversupply will impact returns long-term. Some sub-sections of the market—namely skilled nursing—have been especially impacted.
So, is senior housing still a smart investment? Research says “yes.” Survey results from CBRE shows that 59 percent of U.S. investors still plan to increase their size of their senior housing portfolios in 2017. And that’s up from 47 percent last year. It would seem many are confident that plenty of opportunity remains in the sector—so long as investors keep the following key factors in mind.
- Do Your Research: There is absolutely no substitute for due diligence when it comes to senior housing investments. Whether you are looking to invest via a private equity fund or Real Estate Investment Trust (REIT), make sure the fund manager is experienced, knowledgeable, and aware of current market trends. Ask for a portfolio of past investments and upcoming deals, as well as a history of past returns. And lastly, ensure that they take time to consider each investment on its own, analyzing all existing competitors and demographics before making the decision to invest.
- Look Beyond Primary Markets: While it’s true that many primary markets are facing the possibility of oversupply, many secondary and tertiary markets still hold tremendous potential for new construction and renovation. In fact, a significant portion of the current supply, generally across all markets, is old and outdated, leaving much room for enhancements to make spaces more sociable and comfortable for senior residents.
- Ask the Tough Questions: Fund managers will often tell you that the operator plays a significant role in determining whether a senior housing investment will be a success—sometimes even the most significant. Says Dan Brewer, Chief Fund Manager at SeniorLivingFund.com, “The operator is hands-down the most important player in our investment decisions. They can make or break any opportunity, regardless of market or demand.” Don’t be afraid to ask who your fund is working with, for how long, and with what outcomes.
- Stay Informed: Just as skilled nursing saw a decline this past year, memory care has also been maxed out due to overbuilding. Also surprising: independent living has jumped up as a favorite investment opportunity, which has not been the case in recent years. In fact, it reached a seven-year high in occupancy rates closing out 2016, and the highest absorption rate in a single quarter since NIC began collecting data in 2006. Keep an eye on current issues to make sure the fund or REIT you select is on trend.
- Keep Expectations Realistic: As with any investment opportunity, market conditions, such as interest rates and political issues, can always impact returns. Although senior housing has seen unparalleled returns in the past decade, it’s reasonable to assume the industry will continue to grow, but perhaps at a slower pace or lower rate.
Perhaps the best news about investing in senior housing is this: the opportunity has just begun. The current wave of seniors entering the senior housing market is only the first wave of many to come. Research shows that the 75+ population is expected to grow at rates above the current inventory growth rate (3.1 percent) through 2021. In fact, for those aged 75-79, growth rate is expected to be as high as 5.7 percent. That leaves plenty of room for expansion in the sector—and plenty of room for solid returns on the past of smart investors.
Jess Stonefield is passionate about senior longevity and the concept of equitable equity—spreading the wealth among those who need it most.