This article was first featured in the Institutional Real Estate Inc.’s Niche Properties in the Spotlight report, in September 2021.
The childhood memory of Grandma in a nursing home, living there for years, is a relic of the past. Arguably, no other segment of real estate has evolved as much as senior housing, despite its relative infancy in the institutional investment market. The sector has faced many challenges through the years — including the global financial crisis, oversupply and, more recently, the COVID-19 global pandemic — and yet opportunity abounds as the sector enters the next phase of its evolution.
The sector spawned from nursing homes, which often meant multiple residents in a single room and reliance on state and federal funding. Industry pioneers and innovators Bill Colson of Holiday Retirement and, later, Paul Klaassen of Sunrise Senior Living, among many others, saw a better way, and they transformed those communities into attractive lifestyle living options, with active social calendars (dining room gossip will remind you of high school cafeterias!), attractive living options and amenities, and professional assistance in providing care for the needs of daily living.
A senior housing development and initial public offering (IPO) boom circa 1998-2000 existed, in conjunction with the internets boom. Capital rushed into the space, and many companies took the opportunity to access public markets, thereby developing a virtual tidal wave of new communities. Today the number of public operating communities can be counted on one hand operating communities can be counted on one hand — due partly to consolidation but also evolution of the product and business model — and operations have typically separated from investment and ownership. Public real estate investment trusts (REITs) provide some of the major investment capital in the space, with the largest healthcare REITs now among the largest REITs in the United States in any sector. Institutional equity funds serve as another significant factor. By some accounts, more than $9 billion sits in privately managed funds, targeting pure-play senior housing and ready to pounce. The market remains small relative to other real estate sectors, although outsized returns and an aging population are garnering more interest.
Following the development wave of the late 90s, the industry settled in, succeeded and grew despite what was a relatively unspectacular era for demographics. Much has been made of the recent wave of development within the sector after the global financial crisis, but that wave peaked a few years ago, and the new supply wave is ebbing. The COVID-19 pandemic has further put a damper on new development, which may take time to spin back up.
The median age of senior housing communities remains more than 15 years. True, many of the communities can be refurbished, but many are also functionally obsolete. A shiny-new-penny community poses a threat to older communities that don't provide exceptional care. Resident expectations of physical plants have also evolved; for instance, wellness centers, on-site therapy, and multiple and distinct dining options represent some of the newer amenities that are essentially required in competitions for new residents in today's competitive senior housing world.