Today, the senior living market has a perfect storm of factors creating an unprecedented demand. With the aging of the baby boomer generation, this has caused a huge demand-supply imbalance. Mike Gordon, the global Chief Investment Officer of Harrison Street, highlights a noteworthy trend: over the next five years, more than four million boomers will reach the age of 80. That demographic momentum is causing occupancy in active adult and assisted living communities to continue increasing at a breakneck pace.
Harrison Street is an alternative real estate investment management firm. Though relatively small, with $55 billion in assets under management, they have been leaders in taking a proactive approach in the sector. Against the harrowing backdrop of 2020 and 2021, the company purchased around 20 communities for seniors. Gordon is a 40 year veteran of the industry. Still, he’s bullish on where things are headed in the space. As he explained, the extreme uncertainty that characterized the first years of the pandemic has mostly dissipated.
Deb Cafaro has been at the helm of Ventas for over 25 years. In this piece, Peters stresses the amazing long-term potential of the senior living space. Ventas claims a $23 billion market capitalization. In short, it’s poised to flourish in what Cafaro terms the “longevity economy.” When it comes to senior living, she’s forecasting demand to grow by 28% in the next five years. This jump illustrates a trend of rising demand for senior living alternatives.
On this front, the state of inventory growth in senior housing paints a troubling tableau. This marks the first time inventory growth has dipped below 1% on an annual basis since 2006. Given that it is currently experiencing a major drastic slowdown, it raises serious alarms on whether it can meet this burgeoning demand. Dwayne Clark is founder and CEO of Aegis Living. He operates senior living facilities in Washington, California and Nevada, a man on the frontlines of an industry facing a stiff supply-demand imbalance that alarmed him.
“There’s a problem brewing, and the only metaphor I can think of, it’s like putting a party balloon on the end of a fire hose and watching it increase with great velocity. Velocity without being able to do anything until it pops.” – Dwayne Clark
The impact of this disparity lines the pockets of industry profiteers and puts tremendous pressure on responsible leaders in academia. Cafaro is quick to point out the opportunity for Ventas given the historic lack of supply in senior living. This ranges from active adult communities to assisted living and memory care facilities.
Ventas likes where it’s seeing rising occupancies—in its 850 senior living communities. To sustain this remarkable growth, the company is spending billions annually to renew its aging assets. Cafaro is confident these investments will pay out like crazy.
“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, and right now that’s part of our strategy.” – Deb Cafaro
She’s insistent that the firm is expressly in the market buying properties at or below replacement cost. At the same time, they are raking in good internal rates of return.
“We feel really good about our base of 850 senior living communities, where occupancies are increasing. And we also feel good about the multibillions of dollars we’re investing every year in existing assets.” – Deb Cafaro
The unpredictable construction market ahead is another longtime source of worry for just about all industry stakeholders. Clark points out that the current situation is unprecedented in his 40 years in real estate:
“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.” – Deb Cafaro
With growing demand and inventory still deeply constrained, the perfect storm remains. Our market leaders are energized and positioned to take advantage of these developing trends. Cafaro, who has seen a dramatic change among real estate investment trusts (REITs) over the last 20 years.
“It’s the lowest amount of units we’ve seen since 2009, the lowest. And, again, I’ve done this for 40 years. I’ve never seen such a lack of construction starts.” – Dwayne Clark
As demand increases and inventory remains constrained, market leaders are confident in their ability to capitalize on these emerging trends. Cafaro notes a significant shift within real estate investment trusts (REITs) over the past two decades.
“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.” – Deb Cafaro