Savvy developers and investors look beyond raw data when sizing up projects
By Jane Adler
Look at any demographic chart and it’s easy to see why real estate investors like seniors housing. The number of people age 65 and older is exploding. In 2014, there were 46.2 million seniors, representing 14.5 percent of the U.S. population. By 2060, the number of seniors is expected to more than double to 98 million.
While the basic population trends portend a rosy outlook for service-enriched housing targeted at older Americans, a deeper dive into the numbers reveals crucial nuances that could make or break a new project.
Elders who move to a senior living community today are quite old. The average age of a person moving into seniors housing is between 82 and 84, according to sources. Assisted living residents tend to be even older.
Those who choose to remain in their homes tend to be healthier than their predecessors, which will impact demand. Meanwhile, the overall slowdown in population growth means both fewer workers and family caregivers, presenting new challenges and opportunities for the industry.
“So much of what is happening in seniors housing is a function of demographics,” says Beth Burnham Mace, chief economist for the National Investment Center for Seniors Housing & Care (NIC) industry based in Annapolis, Md. “Operators need to be prepared to respond to the changes.”
Redefining the target market
Recognizing that younger seniors generally don’t move to senior living communities, industry analysts have traditionally defined the target market as people age 75 and up. The latest research, however, boosts that age to 80, and older. A recent report by the American Seniors Housing Association (ASHA) uses the 80-plus age category to project demand for housing going forward.
“Very few people at age 75 move to a senior living community,” says Francesco Rockwood, president of Rockwood Pacific, a senior living services firm based in Berkeley, Calif. Rockwood’s company, along with Senior Housing Analytics, produced the ASHA report, titled “A Projection of U.S. Seniors Housing Demand 2015-2040.”
The U.S. population over the age of 80 is projected to increase by 3.4 percent per year from 2015 to 2040, according to the ASHA report. “The demographic growth trends are good, but not extraordinary,” says Rockwood. He notes that people are moving to senior living communities at older ages in part because they’ve remained healthy longer, and seniors who are fit tend to stay in their own homes.
Other factors impact demand
According to a 2012 AARP analysis of data from the U.S. Census Bureau, the average annual retirement income for Americans 65 and over was $31,742. Without significant savings or home equity that can be converted into cash, many seniors can’t afford assisted living with monthly prices of about $3,600.
As the industry struggles to address the affordability issue, Rockwood thinks seniors housing will continue to serve the affluent population — a relatively small proportion of elders. And the size of that group probably won’t change in the next few years unless another big economic downturn hurts everyone, including well-off retirees, he says.
Technology is a wildcard that could suppress future demand for seniors housing, says Rockwood. New innovations could help seniors remain safely in their own homes longer. Smartphones, sensors and apps are already being used to monitor seniors and track important health indicators, such as blood pressure. “It’s something to pay attention to,” he says.
For the near term, the ASHA report assumes that the penetration rate — the percentage of people over age 80 who live in seniors housing — will remain at its current level of about 11 percent. Demand for seniors housing will most likely not support a great deal of new development until after 2025 when the baby boomers start to turn age 80. At that point, the annual production of seniors housing will need to ramp up, says Rockwood.
Developers need to deliver about 25,000 new units annually between now and 2020 to meet demand. But 96,000 new units per year will be needed from 2030 to 2035 for the peak period of demand growth from the baby boomers. “We have the wind at our backs,” says Rockwood.
Underlying trends
While an aging society benefits seniors housing, less obvious demographic shifts are having an impact on the industry. Take, for instance, the growth of small families. In the 1970s, mothers gave birth to more than three children on average. Mothers today have 2.4 children on average.
As a result, fewer children are available to care for seniors. The seniors housing industry quantifies this as the caregiver support ratio, or the number of potential caregivers ages 45 to 64 for each person age 80 and above.
According to a study by the AARP Public Policy Institute, the caregiver support ratio in 2010 was more than seven potential caregivers for each person age 80 or older. The ratio is expected to decline to 4-to-1 by 2030, and 3-to-1 by 2050.
“It’s a big demand driver for seniors housing going forward,” says NIC’s Burnham Mace.
But the expected slowdown in overall population growth will result in fewer available workers for the senior housing industry. A study by Argentum, the assisted living trade association, estimates that the industry will experience a shortage of 1.2 million workers by 2025 — less than 10 years from now.
According to a study published in June 2015 by researchers at the University of California-San Francisco, at least 2.5 million more workers will be needed to provide long-term care to older people in the United States between now and 2030.
The risk for operators is the rising cost of labor amid fierce competition for workers. Higher rents will be needed to cover workers’ wages, says consultant Rockwood. “It might reduce the number of people we can serve.”
While macro trends provide an insight into overall demand, developers and investors are mostly concerned with local and regional demographics. They want to know if a new project in a specific location makes sense.
In general, desirable markets have a high concentration or growing number of seniors. Florida, for example, has one of the nation’s oldest populations. There were 3.3 million seniors age 65 and over in 2010, according to the U.S. Census Bureau. By 2030, Florida’s senior population is projected to total about 5.9 million, a 78 percent increase from 2010.
The West and South regions experienced the fastest growth of 65-plus and 85-plus populations between 2000 and 2010, according to the Census Bureau. The West recorded the fastest growth of the 65 and older population, which rose from 6.9 million in 2000 to 8.5 million in 2010 across the region, a 23.1 percent increase. The West also experienced the fastest population growth of seniors age 85 and above, increasing from 806,000 to 1.2 million, nearly a 49 percent increase.
The East and West coasts, where incomes tend to be higher than in other parts of the country, are preferable, according to investors and developers. They also like infill areas of metropolitan markets. These locations tend to have high barriers to entry, such as difficult zoning processes and expensive land costs, which helps keep competition from other developers in check.
A relative newcomer to seniors housing, CA Ventures uses a proprietary demographic model to pick locations. “We are looking for age- and income-qualified seniors,” says Ben Burke, senior vice president of senior living at CA Ventures. The Chicago-based company develops and invests in a variety of commercial real estate sectors including student housing and multifamily projects.
The company recently opened its first seniors housing project in Olathe, Kan. A former Holiday Inn Express was converted into a 135-unit facility, with 75 assisted living units and 60 memory care units.
The town of Olathe is located in Johnson County, near the upscale suburb of Overland Park, in the Kansas City area. The median household income in Johnson County as of June 2012 was $73,052. CA Ventures has six other projects either underway or about to break ground, including one in Overland Park, Kan. Eight more are in the planning stages.
CA Ventures’ demographic model includes data on income, local housing values and migration patterns. “We want to see the 75-plus population growing,” says Burke. “We try to see where the (hockey) puck will be, not where it is.”
Seeking adult children
Another important metric is the number of adult children ages 45 to 65, and whether that group is growing. CA Ventures seeks locations with a higher proportion of adult children than the national average. According to the Census Bureau, 26.4 percent of the population falls into that age range of 45 to 65.
“A high proportion of adult children is a good indicator of an in-migration of frail seniors,” says Burke. Adult children often relocate their elderly parents to live nearby. Burke seeks an area with a high percentage of adult children whose household incomes exceed $100,000, since they often contribute to the care of elderly parents.
The model uses a variety of federal government statistics and other sources to determine how many seniors in a specific market area are likely to be frail and require help with the activities of daily living (ADLs), making them candidates for assisted living.
Demographics also help determine unit mix. For example, Burke has observed that more couples are moving into senior living communities. “We are building more one- and two-bedroom units,” he says.
The unemployment rate among adult children is among the factors considered by Blue Moon Capital Partners, a seniors housing investment management firm based in Boston. The company has new projects underway in Lakewood, Colo.; Dover, N.H.; Katy, Texas; and Northville, Mich.
“Understanding the local metropolitan area is crucial,” says Kathryn Sweeney, co-founder and managing partner of Blue Moon. “We really listen to our local development partners.”
Sweeney focuses on the unemployment rate among adult children with college degrees, which currently stands at approximately 2 percent. “They have the means to move parents, or help support the rental payment,” says Sweeney.
She adds that adult children often help their parents decide where to live. As a result, the company’s new developments are designed to appeal to younger people by featuring high ceilings and modern layouts. “We are entering a phase where there is a much higher level of customer discernment,” she says.
High home values are desirable
Local home values, often driven by demographic changes, factor into the decision of where to locate a new senior living project, say developers. They prefer markets with strong housing demand and rising home values.
In general, home values have been increasing since the end of the Great Recession, which helps deepen the pool of potential seniors housing customers. A recent study completed by the Urban Institute found that housing wealth is concentrated among older adults. In fact, those age 70 and older have the most housing wealth of all age groups with access to an average of $161,000.
Multifamily developer Alliance Residential Co. is jumping into the seniors housing market with plans for three to five new communities a year. An area with high home values is important, says Dale Boyles, managing director of seniors housing at Alliance.
The company’s first senior living project will be in the high-priced San Francisco Bay Area, though no details are available yet. A home purchased in that market in the 1960s for $85,000 may be worth as much as $2 million today, notes Boyles, who operates out of Alliance’s office in Escondido, Calif. “We look at that as an indication of the ability to pay for senior living.”
Boyles analyzes the number of seniors in several different age buckets, and plans projects accordingly. But he doesn’t necessarily agree that younger seniors — those age 65 —can’t be drawn to a new community. “We want to bring a high-end multifamily look into the senior living space,” says Boyles.
A modern property with the right amenities in a desirable downtown location can attract retirees looking for a certain lifestyle, he adds. “We see a need for a premium 55-plus active adult rental community.”
Local market dynamics are the key to success, say developers. Feasibility studies have traditionally analyzed the characteristics of a population within a two-, five-, and 10-mile radius of a proposed development.
Blue Moon’s new rental project, the Village at Belmar, in Lakewood, Colo., is drawing seniors from up to 20 miles away. “No market study would have predicted that,” says Sweeney.
The Village at Belmar features a main building with 72 assisted living units and 24 memory care units. Sixty independent living units are located in 15 quadplexes, with two units up and two down. Each building has an elevator.
Sweeney compares the Lakewood market to that of Portland, Ore., which tends to attract seniors whose adult children have relocated there. Depositors are referring their friends to the project, too. “Understanding where residents are coming from is so important,” says Sweeney. “You have to look beyond the raw numbers.”