Investors have a new dose of confidence in the nation’s strengthening commercial real estate market, and that includes the market for senior living development, a recent survey suggests.
Despite concerns that some senior living markets are overheating, real estate executives see huge potential for senior living development, according to the sixth annual Akerman U.S. Real Estate Industry Outlook Survey.
Akerman is a transactions and trial law firm specializing in middle market mergers and acquisitions within the real estate and financial services industries.
Each year since the real estate downturn, the firm has surveyed industry executives to provide a view from the c-suite, highlighting a number of market indicators including capital availability, investor trends and key growth drivers in the sector.
Of the total 179 interviews that were completed in March, 23% of survey respondents were developers, 23% were investors, 15% lenders, 13% owners and 26% “others,” which includes appraisers, architects, brokers, consultants and lawyers.
Though the report did not disclose how many respondents operate in the senior living industry specifically, 31% of executives said they expect senior living development to be the most active within the multifamily sector, compared to 47% for apartment development and 22% for condominiums.
While more than half (58%) of real estate executives believe the multifamily sector will continue to lead commercial real estate throughout the recovery, seven out of 10 agree that apartment development will drive multifamily activity, compared to 17% who believe as such for senior living.
“When it comes to health care real estate and senior housing, investor appetite is at a high, as property valuations continue to rise in the wake of attractive profits from the sale of those asset classes,” said Beppy Owen, co-chair of Akerman’s Senior Living Facilities Practice.
There are three “megatrends” Akerman notes that will have the most impact on future development: job recovery, new urbanism and the Baby Boomer population.
“The aging population, coupled with housing preferences and needs, is creating an attractive outlook for both the senior living and health care real estate sectors,” Akerman states in the report.
To that end, 26% of executives surveyed said they believe this trend will have the most impact on real estate development, especially in the next two decades as the Baby Boomers age, in turn fueling greater demand to build retirement communities and healthcare systems.
“Developers with a qualified track record in senior living properties are poised to benefit from the anticipated housing needs,” Akerman states. “Changing practies in the delivery of health care are increasingly shaping real estate development, building design, and investment models. Senior residents expect more quality services, which are not only influencing where facilities are built, but also how they are built.”
The complex needs of senior living residents, particularly those with physical and memory impairments, are also shaping key design principles in the development of real estate. Because of this, investors will need to consider whether a senior housing opportunity constitutes a real estate investment or a health care industry investment, Akerman noted.
“Health care systems are moving more into a space that adapts market principles to the delivery of client-centric care,” said Owen.
Within the senior housing spectrum, property types that have the fewest regulatory hurdles and requirements stand to be the fastest-growing segments of the market.
“At one end is independent living, which has the fewest regulatory and licensing barriers of entry and is, not surprisingly, the fastest-growing area within this space,” the report states.
Though assisted living and memory care require more regulatory and licensing requirements than independent living, the report notes these sectors are also experiencing significant investment, despite their places on the higher-end of the spectrum where more health care services are provided.
And this is largely influenced not only by regulations and licensing requirements, but how operators of facilities are paid for their services either via private-pay sources or state and federal reimbursement programs.
“There is a greater perceived risk on the higher end of the spectrum, because those who would operate the properties are more heavily depending on the whims of government reimbursement programs than the private markets for revenue,” Owen told SHN.
When it comes to financing development, executives largely predict that banks will drive financing more than any other funding source, though capital from private equity investors and real estate investment trusts will also be main sources of real estate financing as well.
“There’s a tremendous amount of interest in this [senior living] space within the context of real estate,” Owen said. “We know for a fact that current supply is insufficient to meet the current demand, and that demand will continue to increase as more and more Boomers enter their twilight years. So, it’s quite natural for new developers and investors who are looking for opportunities to look at the growing need for these types of properties.”
Written by Jason Oliva