The senior living sector is experiencing an unprecedented surge in demand as the aging Baby Boomer population begins to reach 80. According to a recent analysis, the demand for senior living options will continue to increase. Over the next five years, we expect a combined 28% expansion in active adult, assisted living and memory care communities. This emerging trend has a profound effect on large public players such as Ventas. As a senior living focused real estate investment trust (REIT), Ventas has a market cap of $31 billion.
Under the leadership of CEO Deb Cafaro, Ventas has enough cashing in on the worsening lack of senior living overall and made a payday. The firm’s emphasis is on sourcing value-add opportunities in existing properties rather than new developments from the ground up. It is well poised to continue benefiting from the increasing occupancy rates. Its portfolio of interests comprises 850 senior living communities. Over 4 million Boomers will hit age 80 within five years. Accordingly, the need for these facilities will skyrocket.
Cafaro shines a light on that quickly emerging segment called the “longevity economy.” Watch as he highlights how Ventas is uniquely positioned to succeed in this new landscape. “Frankly, over the course of the past 20 years, I can’t identify another period where we were more excited about the current setup within the sector,” she stated.
Today, occupancy at both active adult and assisted living communities approaches pre-pandemic norms and is increasing at an accelerating rate. This explains why demand is surging higher than ever. This boom comes at a time when annual inventory growth in senior housing is now below 1% for the first time since 2006, creating another key supply constraint in the market. According to Cafaro, “As an owner with one of the largest footprints of senior housing, of existing stock in the U.S., we’re benefited by the higher cost of development, because we have an installed base and we’re acquiring assets actually at below replacement cost.”
Growing pressure on supply and increasing demand are contributing to rising rent prices. Consequently, the senior living industry is experiencing close to 5% growth in annual average monthly rents. In some markets, these hikes have soared into high single digits. Such a scenario would create an unprecedented opportunity for Ventas to reinvest billions per year back into its existing assets while still reaping double-digit returns.
We’re buying billions of dollars a year in senior living, and we’re seeing returns in the sevens going in, with low to mid-teens, unlevered IRRs [internal rates of return], so there’s significant growth in assets, and we’re buying below replacement costs, Cafaro added. The company’s focus on data is clearly paying off. It’s a real masterstroke in what’s become a high-demand, low-supply scenario.
Dwayne Clark is the founder and CEO of Harrison Street, a nationally recognized alternative real estate investment management firm. As someone with $55 billion in assets under management, what he’s saying strongly lands. He highlighted the critical state of supply within the sector: “It’s the lowest amount of units we’ve seen since 2009, the lowest. And once more, I’ve done this for 40 years. I’ve never seen such a dearth of construction starts.
In recent years, Harrison Street has taken action in the senior living market, acquiring about 20 senior communities during 2020-2021. This partnership represents a larger industry trend of investing in proven, high-quality properties as market conditions continue to tighten.
Mike Gordon, another industry expert, expressed optimism regarding the current state of senior living investments: “I’ve never seen that combination of investment characteristics in my long career in real estate, and so we’re fully taking advantage of all of that.” Taken together, these observations point to an emerging consensus among stakeholders in the industry about the unlocking of positive market conditions for investment and expansion.
The current climate has brought this issue to the forefront and accelerated the shift in priorities for real estate investment trusts. Cafaro noted this trend by comparing past market compositions: “Think about 2000 in the real estate investment trust business — office was over 20% of the overall REIT pie, and health care was 2%. Now when you look at the pie, office is 5%, and what is it now? It’s health care, senior living. It’s data centers. It’s cell towers. Why? Because that’s where the demand is.”
Our rapidly aging population is changing the future of senior care. Companies like Ventas and Harrison Street, and many others, are prepared to meet these challenges, with commitment and vision. With ongoing investment strategies aimed at maximizing returns while meeting rising demand, they are set to navigate this complex market effectively.