Written by: Adam Tannenbaum
The baby boomer generation began turning 65 in 2011 and in the next nine years, the whole generation will be 65-or-older. A report from the Joint Center for Housing Studies at Harvard found that by 2035 one out of every three U.S. households will be headed by someone over the age of 65. By 2050, the 65-plus age group is estimated to exceed 85.6 million people, 50% over the 56.1 million people that were 65-or-older in 2020. The number is even more drastic for the 85-and-over cohort, which is estimated to exceed 18.5 million people by 2050, a 177% increase over the 6.7 million people that were 85-and-older in 2020.
America’s booming senior population is not only be driven by baby boomers retiring, the U.S.’s second-largest generation behind millennials, but also by changing mortality rates. In 1972 the average life expectancy of a 65-year-old was 15.2 years, by 2017 that number was 20.4 years. It is presently estimated that one out of every four 65-year old’s will live to 90 and one out of every ten will live past 95.
There is currently a lack of units to house America’s growing senior population and the problem is only expected to get worse in the coming decades unless drastic supply-side initiatives are taken to build and preserve more senior housing apartments and homes. This housing shortage particularly affects low and middle-income seniors. Around ten million households with an occupant over the age of 65 spend 30% or more of their income on housing and about five million of those households spend more than 50%.
The supply-demand mismatch of senior housing around the country in conjunction with a growing segment of the population that is continuing to live longer has driven healthy investor returns in the senior housing space. Over the last ten years, stabilized senior housing communities have cumulatively outperformed multifamily assets by 1.99%, that number increases to an aggregate outperformance of 3.37% by stabilized senior housing communities over multifamily properties when measured over 15 years.
Not only have senior housing properties outperformed traditional multifamily assets, but they are cheaper to acquire. In the third quarter of 2020, the average capitalization “cap” rate for senior housing properties nationally was 5.80% versus 5.18% nationally during the same time period for multifamily. Cap rates are used to determine the value of investment properties and higher cap rates equate to cheaper valuations and higher yields.
Despite the challenges that Covid-19 presented to senior communities, demand for the property type should continue to remain robust due to strong fundamentals in the space. Between 2014-2019, $17.2 billion was invested into senior housing and care centers. Medical office space attracted the second-highest amount of capital for niche property types during that time span, raking in only $12.2 billion in investments.
Another interesting trend is that during the pandemic, the worst-hit senior housing properties were public facilities that catered to residents on Medicare or welfare programs. Institutionally owned facilities that featured private rooms and more-experienced staff fared better.
The challenge going forward for the senior housing industry will be to make sure there are enough units to meet the demographic trends that will continue to drive demand in the space for people across all income brackets. Repurposing hotels and even office buildings into senior housing facilities can be one way for developers to find creative and lower-cost methods to build much-needed units across the country. Many hotels and offices sit in high-density areas that once converted to senior housing, can provide apartment homes within walking distance of vibrant downtowns. Also, converting existing hotels into multifamily properties, specifically senior properties in this case, is a lower-priced alternative for unit creation compared to ground-up development. It is estimated that converting a hotel into a multifamily property can be up to 63% less expensive than ground-up development.
The Active Adult segment of the senior housing industry also looks to grow in the coming years. Active adults are generally defined as seniors between the ages of 65-82, but more broadly are retirees looking to move into senior communities that do not need congregate care senior housing. It is estimated that 90% of this age cohort does not require daily medical supervision.
Active adults generally stay in properties five-to-seven years longer than residents at traditional multifamily assets. Also, most residents living in Active Adult communities do not rely on active working income to pay for rent, but rather live off of retirement savings. This has led to a less than 1% rental default rate at Active Adult communities nationwide, which is much lower than traditional multifamily properties.
Longer life spans and an aging population will only lead to more growth in the senior housing space in the coming decades. At the moment, the U.S. does not have the supply of senior housing units that will be needed to let its baby boomer population retire comfortably and with dignity, no matter the income bracket a person comes from. Over the coming years, it is imperative that the federal government and states expand their respective tax credit programs or come up with new financing mechanisms to encourage developers to create, protect, and preserve senior housing around the country.
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 Social Security Administration, Retirement & Survivors Benefits: Life Expectancy Calculator