Eddie Lorin – Managing Partner at Strategic Realty Capital
The population of American seniors is at the midpoint of steep climb. This growth is being steadily fueled by an ever-aging Baby Boomer generation. Many have already joined the ranks of the 65-plus, but there are even more waiting at the gates.
Every year, the numbers rise further. At the turn of the millenium, 2.5 million Americans graduated to senior status. This year, the added headcount will reach 3.5 million.
This annual expansion won’t level off for at least the next twenty years. By 2030, the number of Americans aged 65 and over will be an estimated 72 million. That’s up from 40 million in 2010.
But an aging demographic population doesn’t mean a poorer or less productive one. In fact, despite the faltering economy of the last five years, American seniors are richer than ever.
Seniors, especially women, are more and more choosing to delay retirement and continue working into their later years. As a result, the number of senior citizens living in poverty has declined from 15% to 9% since the mid-1970s, while the proportion of older Americans enjoying a “high income” increased from 18% to 31%.
This senior demographic, growing mightily both in size and amount of cummulative wealth, will be the biggest driver of our economy going forward.
There is hardly a national market that won’t feel the deep effects of this massive shift, and real estate is no exception.
A Sector Going from “Meh” to Major
A growing population of financially strong elderly Americans points directly to senior housing as an increasingly attractive investment opportunity.
With favorable demographic fundamentals, yields higher relative to conventional apartments, and an uncontroversially positive long-term outlook, the senior housing market is expected to transition from a niche market to a major specialized market.
The big story is the aging population, but the smaller details drive the point home…
Facilitated by a restrained supply pipeline over the past six years, occupancy levels for senior housing assets rebounded from lows recorded in 2001-2002 to exceed 92% today (and climbing) in many metro areas.
Operating business models are better-defined, contributing to strong revenue growth and higher profit margins. Annual documented rent growth in the sector remains a healthy 4% to 5% percent.
In response to improved operations and increased investor interest, asset prices are increasing to record levels while cap rates are falling to single digits, ranging from seven to nine percent. The cap rate spread between senior housing and conventional apartments has declined from 300 basis points (bps) to 150-175 bps.
Since the senior housing market is driven by surging senior population and not directly related to external economic factors such as economic growth and the unemployment rate, the addition of senior housing assets to a portfolio could increase diversification and lower market risk.
Lastly, turnover in Senior Housing is comparatively low. The typical resident stays in a home for many years (sometimes decades), whereas conventional apartments have an average turnover rate of 60% annually. In effect, senior housing holds much lower annual turnover costs and reduced risk.
Where You Can Start Investing in the Inevitable…
The aging population is going to keep getting older. And the financially strong elderly population is set to underpin the stability of senior housing assets. Strategizing on this basis will allow for smart value maximization, and in turn, greater potential returns for investors.