Seniors housing in the U.S. is being built at record pace, as demand remains unabated.
The seniors housing sector added 21, 000 units in 2018, a record number, increasing inventory by 3.5 percent over the year, according to JLL research. Yet the fourth quarter of the year also saw the biggest increase in occupied units since 2006.
“It was the strongest pace of demand we’ve ever seen, even with the growth in inventory,” says Lisa Strope, JLL’s Director of Research, Healthcare, Life Sciences, and Seniors Housing.
An aging population
The United States is aging, and fast. The portion of the population aged 65 or older is expected to hit 20 percent by 2030, up from 15 percent today.
According to the US Census Bureau’s 2017 National Population Projections, the over-65 population will nearly double, to 88 million from today’s 50 million. With life expectancy creeping up, to 76 for men and 81 for women, the impact will be felt across the economy, hitting hardest with its demands on healthcare and senior housing.
“There will need to be an unpredecented amount of senior housing to meet this demographic change,” Strope says.
Developers have been responding to these projections. At the end of 2018, U.S. senior housing was comprised of about 23,500 professionally managed communities with 3 million units. According to NICMap, over 20,000 new units were added to the seniors housing inventory, a record number, up from roughly 5,000 units added in 2017.
2018 also saw a record high for demand with more than 14,000 units absorbed on a net basis, up from roughly 12,000 in 2017. The increase in inventory did trigger a small drop in occupancy (20 basis points), though the sector is still very tight. The average senior housing property offers about 113 units and has a 92 percent occupancy rate, compared to 92.2 percent a year earlier.
“The drop was enough to cause some concern in the investor community,” Strope says. “But on the flip side, last year, the sector saw 3 percent rent growth. Occupancy was stable and has been inching up in last three quarters, so we see the forecast as positive,” Strope says.
Resistant to cyclical fluctuations
Senior housing encompasses multiple subsectors. Age-restricted apartments have no or relatively few amenities, and can be more affordable.
The independent living, assisted living, memory care, and skilled nursing subsectors offer varied amenities and levels of care. Rental rates in these subsectors tend to be higher to account for these services.
“All property types in this sector are seeing a lot of momentum because it’s a needs-based demand real estate product, it tends to be more counter cyclical than other types,” says Strope.
Senior housing weathered the recession better than most products – occupancy typically hovers between 87 pecent and 90 percent, even during the economic crisis a decade ago.
Senior housing does have its challenges, however, especially because it relies heavily on talent acquisition and retention. The U.S. is in the midst of a skilled nursing shortage, between the rapidly aging population and the impending retirement of 25 percent of working nurses.
The outlook on skilled nursing valuation is less than optimistic, because it adds pressure to steeply increase wages amid low retention rates.
“The U.S. is desperately short of nurses. That’s an issue,” says Strope.
But the operational challenges still don’t outweigh the overall potential.
“It’s definitely a top product type for investors to focus on,” Strope says. “There’s a ton of momentum around this sector.”
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