The senior housing industry’s cyclical nature means it’s a matter of when, not if, the sector eventually gets overbuilt, and the biggest danger is in the lease-up phase—especially if there are several new developments in the same market.

“In certain submarkets and certain product types, it will be overbuilt,” said Jeff Kraus, managing director of Spectrum Retirement Communities, LLC and panelist for a NIC 2013 Regional Conference session. “We’re going to have some ups and downs in different product types. The question is, where?

The economy and housing market are both starting to improve, especially in certain areas, says Beth Mace, director at AEW Capital Management, L.P. Supply and demand fundamentals are also in favor of new development—again, more so in some markets—and all these factors together with interest rates and the availability of financing indicate a good time to start developing.

As the demand curve increases, Kraus says, the actual boom in senior demographics is still about 10 years away—but developers can’t afford to wait that long to start building.

However, as more people start breaking ground on projects in certain markets—think Houston, Colorado Springs, or the Twin Cities—there’s potential danger if all the projects open simultaneously.

“The biggest risk of overbuilding is in the lease-up phase,” says Margaret Scott, executive vice president and chief investment officer at Belmont Village Senior Living. “If there are three to four buildings in one market trying to lease-up at the same time, you’re going to have a bloodbath. I think the demand, essentially, is there, but that lease-up—getting someone to move into your community—is a challenge.”

Still, for those planning development, says Mace, it’s important to remember that by 2015, interest rates are likely to go up. Additionally, there’s another important demographic to consider that could impact a market’s suitability for construction.

“Look at the adult children influence in addition to elder demographics,” Mace says. “We think that’s a really important factor into being able to pay the fees for senior housing. Make sure job growth is there for that [adult child] cohort.”

The panel was split on whether they would prefer to break ground in a market with a density of seniors versus a density of caregivers, but all agreed that both demographics are important and could contribute to a key factor that may help prevent oversaturation, according to Scott: the senior housing industry’s penetration rate.

“Right now, it’s a very small percentage of people who are age- and income-qualified,” she says. “Over time, the product will have greater acceptance.”

This has significant implications among baby boomers, especially—not just in the sheer numbers of their generation, Scott says, but because many will have had the experience of helping their parents and other loved ones find a senior living community.

“They’re realizing, this isn’t so bad—or maybe it’s even good,” she says. “They’re going to look at that product in a much more favorable light. I think we’re going to see more increased penetration rates.”

Something else that may help prevent a development boom-and-bust is the financial landscape.

“In the near term, there’s a barrier because of industry finance limitation,” says David Ronck, principal and chief operating officer at Meridian Realty Advisors. While smaller regional banks are “stepping in to fill the void,” he says, “even banks that want to be active and lend are going to have to be choosier and pickier about who they lend to, because of current lending structures.”

In the longer-term, he says, things may loosen up more. For now, many developers are seeing bigger equity requirement components that will help regulate the cycle.

Written by Alyssa Gerace