Senior living market can’t keep up with demand as boomers age

The senior living sector, once considered a niche investment opportunity, is poised for significant growth in the coming years. With over 4 million baby boomers expected to reach the age of 80 in the next five years, the demand for senior housing is on the rise. According to the National Investment Center for Seniors Housing and Care, occupancy rates at active adult and assisted living communities are increasing rapidly, with annual inventory growth dropping below 1% for the first time since 2006.

Investing in Senior Living

Ventas, a senior living real estate investment trust with a $31 billion market cap, is betting big on the longevity economy. CEO Deb Cafaro believes that the combination of low supply and high demand creates a unique investment opportunity, with returns in the range of 7-15% unlevered internal rates of return. Ventas is acquiring senior living properties at below replacement costs, taking advantage of the current market conditions.

Cafaro expects growth in the senior living demand pool to reach 28% over the next five years, driven by the aging population and increasing demand for senior housing. She notes that the demand tailwinds are “incredibly strong and durable,” making senior living an attractive investment opportunity.

Supply and Demand Imbalance

The senior living sector is facing a significant supply-demand imbalance, with only 4,000 new senior living units expected to be developed this year and next. This is far below the 100,000 new beds needed each year through 2040 to meet demand. Dwayne Clark, founder and CEO of Aegis Living, notes that the lack of supply is a major concern, with higher interest rates being a primary roadblock to new development.

Clark’s company, Aegis Living, is a developer and operator of senior living facilities in Washington, California, and Nevada. He believes that the current market conditions, with average rents around $12,000 a month, make it challenging to develop new properties. However, he notes that most residents are able to cover costs using the proceeds from the sale of their homes, which have appreciated significantly in recent years.

Investor Interest in Senior Living

Harrison Street, an alternative real estate investment management firm with $55 billion in assets under management, is bullish on the senior living sector. The company’s U.S. Core Senior Housing strategy posted a 30% increase in same-location net operating income last year, driven by strong rent growth and constrained supply. Mike Gordon, global CIO of Harrison Street, believes that the current market conditions make senior living an attractive investment opportunity, with private investors returning to the sector due to strong rent growth.

Gordon notes that the pandemic had a significant impact on the senior living sector, with severe uncertainty and horror stories of infections and fatalities in senior living facilities. However, he believes that the sector has largely recovered, with more seniors living in these communities than before the pandemic. Harrison Street acquired 20 senior communities during 2020-2021 and is continuing to invest in the sector, driven by strong demand and limited supply.