A hundred years ago, life expectancy in the United States for men was 53 years and 56 years for women. Today it’s approximately 78 and 82 years, respectively (Berkeley, 2019). This increasing rate of longevity has had its deviations due to world wars, contagious diseases, opioid epidemics and other problems, but the overall trend represents a future world where humans will live longer lives. This single demographic trend has dramatic implications for the types and quality of senior care facilities as developers look to satisfy the evolving needs of an aging population. Readers new to the senior living space could imagine this factor alone makes for an attractive investment thesis but, in terms of actually achieving high performance and meaningful capital deployment, senior living has a deceptively high risk and high reward investment profile. Understanding what factors make for a successful facility requires understanding specific local datapoints and trends in addition to having an operational expertise that is often underestimated. Combined with other factors like rising asset prices and a decade marked by market participants chasing yield, the senior living space has seen lots of new entrants; however, these new facilities and senior living operators vary considerably.
According to Kurt Reed, Partner at RSF Partners in Dallas and Cornell alumnus, “Most of the value creation in senior living comes from operations and lots of the people jumping into the space are essentially “tourists” from other areas of real estate.” Essentially, real estate developers and investors see outstanding unlevered yield on costs, and because they might have experience in similar-looking assets like multifamily or hotel developments, they underestimate the operational expertise and strategic skillset needed to bring to market a high-performing asset. A closer look at the statistics helps explain some of the operational intensity and risk to investment. For example, the total number of nursing care and senior living communities is currently around 70,000 properties and these employ over 2,763,000 people with average wages ranging from $38,000 to $58,000 (Curran, 2019). Changing reimbursement levels for Medicare and Medicaid, changes to single family home values in any given area, changes in the number of people with adequate health insurance and even the cost of prescription drugs all factor into the ability to generate profit. The nursing care facility industry alone generated an estimated EBIT of $16.1 billion dollars last year and the prospect of large profits is luring in new investors (Curran, 2019).
Kurt mentioned that barriers to entry are relatively low due to the traditionally lower cost and development scale of individual assets. Some assets can cost between $5 to $30 million to acquire and bring to market, making them relatively accessible to a large number of investors. The last few years have seen a large number of markets become over-built with senior living facilities and some of these overbuilt markets may come as a surprise. High growth markets like Dallas are now below the national average for occupancy and developers have become much more cautious about location. Last year San Antonio saw a point where 25% of senior housing inventory was under construction (Stribling, 2019).
Senior living facilities require a combination of demographic factors that are very specific to the asset class. Having a population that can afford to live in independent and assisted living facilities is obviously critical, but some developers do not truly understand the process by which a senior arrives at their facilities. It is common for seniors to fund their stay by selling their primary home or extracting primary home equity, so identifying areas with relatively high and increasing home prices is important. Senior facilities also need to be in population centers where the adult children of these seniors live in proximity. It’s critical for family to be close towards the golden years and for a sense of community in the next stages of life. Being close to hospitals and having access to public amenities is also valued. Markets that have these key traits are not always the obvious large population centers or high growth cities. St. Louis, for example, has been a fantastic investment for some in the senior living space due to its unique combination of some of these factors.
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Understanding family dynamics and the personal decisions that cause a senior to enter any given facility can help an investor understand where demand will be for future facilities, but the latest trend in senior living has to do with the baby boomer generation’s desire for community. Years ago, many senior living facilities looked similar, falling somewhere between a hotel and a multifamily apartment complex. Now operators must create and maintain the right feel and energy. Investors like RSF Partners strategically look for these older or underperforming assets to purchase, undergo renovations, hire excellent local operators with senior living experience and reposition the assets in the market. Places should not feel sterile like a hospital. Rather, the staff should create warmth in what formerly was an almost clinical environment.
Underestimating the operational intensity needed to succeed has been a common problem in senior living and asset performance can differ drastically from city to city and asset to asset because of how well operators meet the needs of the clients. This operational expertise is one reason that local REITs have performed well in the space and have been a common buyer of senior living. The product type is intensely local to the people in the area and as time goes by, those armed with the operational expertise and the appropriate sensitivity to local demographic needs can outperform the other entrants into the space that are less experienced or less careful.
Works Cited:
Berkeley, U. o. (2019, 03 22). Life Expectancy in the USA. Retrieved from http://www.demog.berkeley.edu/~andrew/1918/figure2.html
Curran, J. (2019). Golden years: A growing economy and aging population will facilitate growth. IBIS WORLD
Stribling, D. (2019, 02 20). DFW Senior Housing Is Overbuilt, But Not In Dire Straits. Retrieved from Biznow.com: https://www.bisnow.com/dallas-ft-worth/news/senior-housing/dfw-senior-housing-97558
World Population Reivew. (2019, 03 22). Life Expectancy by Country 2019. Retrieved from http://worldpopulationreview.com/countries/life-expectancy/
