Developers look to capitalize on the 73 million baby boomers who are now seniors.
By R.J. DeBee III
Baby boomers, the generation that started the rebellious youth movement in the 1960s, are still shaking up American society. They represent a demographic shift known as the “silver tsunami” that is sweeping the country.
The rate of U.S. baby boomers, estimated at about 73 million, entering their senior years continues to grow significantly. An estimated 10,000 people are turning 65 daily, with the leading edge of this age group now in their mid-70s. All of the baby boomers — those born between 1946 and 1964 — will have at least reached 65 by 2030 and comprise roughly one-fifth of the U.S. population.
The population swing means that more housing must be made available for baby boomers who have reached or are nearing retirement age. This generation is expected to lead longer, healthier and more active lives than past generations, resulting in many choosing a home that fits their on-the-go lifestyle.
To meet this demand, active adult communities are popping up all over the country, particularly in the Sun Belt where many older people have relocated to a climate that is kinder to their aging bodies and more accommodating to an active life. Baby boomer and investor demand for this housing type led one industry publication to proclaim active adult communities are “seniors housing’s hottest growth sector.”
There are more than 2,000 U.S. active adult communities — defined as purpose-built multifamily housing for seniors with an emphasis on community and activities — with more under construction and in the planning stages.
Active adult communities are divided into two categories: age-restricted and age-targeted. The former means it must abide by federal housing rules requiring that at least 80 percent of the community is comprised of residents who are age 55 and above, while the latter is marketed to people 55 years of age and older but does not have specific legal requirements for residency.
These communities attract a relatively young senior population (early to mid-70s), as opposed to those in their 80s and older who typically live in more conventional seniors housing options, such as assisted living communities and nursing homes.
According to the National Investment Center for Seniors Housing & Care (NIC), the demographic profile of a typical active adult resident is one who has a $50,000 annual income with a minimum of $150,000 in non-housing related assets, prefers rentals and is familiar with a communal living setting. These residents tend to be engaged in both community and resident experience, may still be full- or part-time workers, with many being married or widowed.
Active adult communities are a relatively new variation of independent living communities. Both offer resort-type amenities and community activities as well as living spaces ranging from studios to single-family homes. Like independent living, active adult communities do not have onsite healthcare services but may provide dining, housekeeping and laundry services.
Various factors are driving demand for active adult communities. One of the biggest reasons is empty-nester baby boomers downsizing to smaller homes requiring little or no maintenance and offering plenty of amenities.
These communities also provide an attractive housing option for healthy baby boomers seeking an environment that offers activities supporting health, wellness and social interaction with their peers.
And during the height of the COVID-19 pandemic, active adult communities experienced consistent demand during the outbreak, while traditional seniors housing did not fare as well.
Investor demand grows
Ongoing compression in capitalization rates for active adult communities reflects continued strong investor interest in this asset class. Active adult living has the lowest cap rate among other types of seniors housing, with Class A properties at an average of 4.6 percent and Class B properties at an average of 5.7 percent, according to one industry report. There also has been a surge in demand for active adult housing from those making investment plays, with many in the private equity sector, in both seniors and multifamily housing.
A Grandview Research report said the country’s active adult housing market is valued at more than $560 billion and is projected to expand at a 4 percent compounded annual growth rate over the next eight years.
Active adult communities have become appealing to owners and investors in recent years because of the length of time residents live in these communities, along with the higher premium on rental rates.
For instance, baby boomers moving into these communities in their early 70s typically stay for an average of seven to eight years. Rental rates for active adult communities typically achieve premiums over traditional, luxury, market-rate communities. These premiums may range from 15 percent to as high as 50 percent, depending on the type of services offered.
Furthermore, these properties are viewed more favorably than traditional multifamily products because they typically have a lower default rate, prohibit renting to those with children, and have fewer noisy parties and other disturbances.
A recent NIC report said active adult communities have an average turnover of 20 percent, compared with a 50 percent turnover for multifamily. The NIC report also stated active adult housing typically has higher rents than traditional multifamily, lower expenses than independent living, and longer lengths of stay that allow for healthy margins in a stabilized climate.
While the outlook is strong, there are market challenges facing active adult housing, along with other types of seniors housing and other real estate sectors. Inflation, rising interest rates, higher materials and labor costs, and other macroeconomic factors are some of the headwinds swirling around.
In the short term, these impediments may dampen some enthusiasm for active adult development projects. However, those concerns probably will not have a significant impact on this seniors housing asset class, given industry projections of the legions of aging baby boomers seeking active adult properties in the years ahead.
Rising demand for active adult communities has given investors keen insight into the development cycle of seniors housing. While active living meets the needs of the initial wave of baby boomers, other seniors housing segments — independent living, assisted living, memory care and skilled nursing — will need to undergo significant expansion in order to house the millions of baby boomers reaching the age of 80-plus over the next decade.
R.J. DeBee is the managing director of BBG Real Estate Services’ seniors housing national practice.