Investors See These 3 Trends Ahead in Senior Housing

The senior housing and care industry is valued at about $300 billion — and growing. This year, in particular, has seen significant activity and investor interest in the space, and experts say there’s more to come.

A quick glance at the biggest senior housing deals of 2014 would give some perspective as to just how active the industry is. (Hint: NorthStar Realty Finance Corp. took the top spot in its acquisition of Griffin-American Health Care REIT II, shelling out $4 billion for the real estate investment trust).

As for investors, who’s buying? It turns out public equity represents roughly 55% of all acquired properties within senior housing (independent and assisted living) and care (skilled nursing) in 2014, according to Chuck Harry, managing director and director of research & analytics at the National Investment Center for Seniors Housing & Care (NIC).


Private equity, on the other hand, accounts for one-third of all transactions, while institutional equity has increased of late to 10%. The “other” category represents the rest of the year’s transactions.

“There is much more diversity in terms of the buyers for senior housing and care transactions that has increased significantly from a few years back,” Harry said during a recent webinar hosted by National Real Estate Investor.

With this increased interest, it’s no wonder the industry boasts a positive outlook for the year ahead. But before launching any big 2015 plans, take a look at these three highlights of metrics and performance from 2014.


1. Push-Pull Pressures Favor Senior Housing

Not surprisingly, there are many factors influencing the senior housing market and its popularity with investors. Demographics play a big part in pushing demand in the sector, as does rising acuity levels and disabilities.

Additionally, there will be fewer family caregivers in the coming years as the baby boomer population ages — a factor that supports the move to senior living. The ratio of caregivers (ages 45 to 64 years old) to those older than 80 will shrink significantly by 2050. Currently, the ratio is 7 caregivers to every one individual age 80-plus, but by 2030, that ratio decreases to 4:1, and by 2050 it decreases to 3:1.

Another factor that favors senior housing is the rise in penetration rates, said Beth Mace, chief economist and director of capital markets at NIC.

“Right now, the penetration rate is roughly 10% and that has been growing over time as the acceptance and understanding of the aging process, and the benefits of moving into assisted living and independent living properties improve and become [more] well-known,” she said.

Other factors — such as accountable care organizations, post-acute care collaboration and cost considerations — are pushing demand down the continuum of care, from hospitals to less expensive settings in senior housing.

2. Strong Market Fundamentals 

As of the third quarter of 2014, senior housing registered $15.3 billion in sales transactions. And, chances are, that number will continue to grow, according to Harry.

“It would be expected to top $18 billion in the near future for senior housing [IL/AL] itself,” he said.

Strong market fundamentals are undoubtedly behind some of that growth. Overall occupancy levels rest at a comfortable 90.3%, up 40 basis points from the second quarter of 2014, and up 100 basis points year over year.

Despite some suggesting prices have become too aggressive, recent reports indicate otherwise. The average price per senior housing unit as of the third quarter was $139,000, down 12% from $159,000 one year prior, Harry said. Skilled nursing, however, has been trending at about $70,000 per unit.

Additionally, senior housing cap rates have remained fairly flat over the past four years, around 7.7%. Skilled nursing is still trending higher at 10.9% as of the end of the third quarter.

But interest rates remain a wild card in the industry, creating speculation among investors.

“There’s been much talk of increased interest rates; as they start to climb it’ll be interesting to see how cap rates trend,” Harry said. “Given the increased interest in senior housing, senior housing cap rates may not react or have as much upward pressure … as we’ll see in interest rates or the 10-year Treasury.”

Overall, despite a slowly recovering real estate market, senior housing is picking back up after the downturn.

“We’re currently about 75% through what was lost in the market downturn,” said Chris McGraw, senior research analyst at NIC.

3. Sector Boasts Consistent Outperformance 

Senior housing properties’ returns have consistently outperformed that of the core property types, including industrial, retail, office, hotel and the NCREIF Property Index (NPI), a composite measurement of investment performance of a large pool of commercial real estate properties.

“This has led many to reference senior housing as ‘new core’ in terms of its property type,” Harry said. “Over the last year, senior housing’s [returns] have been nearly twice that of the NPI. Over the longer term, where the NPI came in at 8.6% for the 10 years ending this third quarter, senior housing was topping 15%. Over that 10-year period, all of the other core property types were within the single digits, but for each of these periods, senior housing has consistently realized double-digit returns.”

With this kind of steady performance, there’s been increased interest from investors looking to cash in on the property type. And no doubt the sector will only continue to grow in the years to come.

“Seniors housing and care has a market value today of about $300 billion, but it’s growing,” Mace said. “It’s growing in terms of interest from developers and operators, and there’s also a growing amount of interest from the families and residents.”

Written by Emily Study

Companies featured in this article: