Affordable Senior Housing Is the Next Big Growth Opportunity

Senior housing operators will be forced to address the growing need of low- to moderate-income seniors in the coming years, as an estimated 3.5 million seniors today don’t have enough money to pay for higher acuity services.

The high-end senior living facilities that have emerged within the past few years just won’t cut it when facing a demographic that has more health care needs, but less money to pay for services and amenities, experts said during an Irving Levin Associates webinar Thursday.

This gap in care will ultimately push the senior housing industry to provide more affordable options, not just for the 3.5 million seniors currently living below the poverty level, but also the large cohort of middle-class Americans who are aging.

“The demographic is going to drive it,” said Alayna Waldrum, housing legislative representative at LeadingAge, during the webinar. “To the extent that anyone wants to grow, you’re going to have to look at where there are unmet needs. I think for a lot of the luxury models and the higher priced [facilities] … it’s going to be really difficult to continue keeping those filled.”

The Need

This month, a report by the Harvard Joint Center for Housing Studies and the AARP Foundation found that while a growing number of the population will require the care that assisted living or nursing home facilities provide, the cost of senior living is too much for the average older homeowner and renter.

Assisted living is estimated to cost between $3,000 and $6,000 per month, while nursing home expenses can amount to $10,000 to $15,000 per month when paid for privately.

“Most seniors can’t afford private long-term care options,” Waldrum said. “It’s not just an issue about people who have very low incomes. I think very few middle-class families are in a situation where they can afford the $3,000 to $6,000 a month for assisted living. It’s really a struggle for folks to meet those housing [needs].”

Cue: business opportunities for the senior living industry.

The Opportunity

One incentive for providing affordable housing to seniors is the low-income housing tax credit (LIHTC) Program, which is an indirect federal subsidy used to finance the development of affordable rental housing for low-income households.

The program was created in 1986 to provide the private market an incentive to invest in affordable rental housing, according to the U.S. Department of Housing and Urban Development (HUD).

Federal housing tax credits are awarded to developers of qualified projects. The developers then sell these credits to investors to raise capital, or equity, for their projects, which reduces the debt that the developer would otherwise have to borrow. Because the debt is lower, a tax credit property can, in turn, offer lower, more affordable rents.

Through LIHTC, senior housing developers will have relatively little out-of-pocket expenses going into the development, but will still be able to serve this growing population.

The caveat: “The gates have closed in many states for developers who aren’t experienced in the program,” says Gates Dunaway, founder and managing principal of The Gates Dunaway Group, an affordable housing consultancy. “To do a tax credit deal, you need to have prior experience.”

However, senior housing operators and developers can still find ways to access equity and lower their operational costs in order to reduce rents and target the low- to moderate-income demographic, she said.

They can increase equity by looking for projects that trigger tax credit boosts, such as those located in difficult-to-develop areas, through the rehabilitation of historic buildings and through grants and subsidized loans.

“These increase equity, reduce debt and make it possible to lower rents on a certain number of units,” Dunaway said.

They can also look for ways to decrease expenses through favorable property tax treatment, historic property tax abatement and green building practices.

But overwhelmingly, the incentive for developing affordable senior housing comes not from tax credits or grants. Instead, it comes from a strong market demand that will shape the industry as rapid growth in the 65-plus population will bring a rise in the number of low-income households.

By 2024, 6.5 million households will have incomes less than $15,000, a jump of 1.8 million, or 37%, in a single decade, the Harvard/AARP study finds. Growth in the number of older households with incomes between $15,000 and $29,999 would add another 2.9 million to the ranks of low-income households.

“The other incentive for folks to understand and to ultimately serve low- and moderate-income seniors is just pure demographics,” said Matt Rule, vice president of affordable housing development at National Church Residences. “It’s a large population and is growing. What we’re seeing is there’s really a need on [existing] campuses to create a different product that serves a senior at a different price point.”

Some providers have found a sweet spot in serving middle-income seniors, but they are limited in number. Bridgewood Property Group, a developer whose projects historically skewed toward the luxury side of senior housing, has branched out in recent years to address the needs of a less affluent clientele, finding that targeting the middle-income bracket offers lower development costs and anticipated demand.

Others are even providing market-rate developments located within close proximity to more affordable housing options. Presbyterian Senior Living opened Heritage Run, its newest market-rate building in Baltimore, Md., earlier this year.

“It may not be that you’re positioned to understand and jump immediately into deep rent-skewing, but it may be that it certainly is in line with your current business model to focus on a moderate-income senior as opposed to a more mid-market or higher-income senior,” Rule said.

Written by Emily Study