IREI's Niche properties in the spotlightIREI'sNichepropertiesinthespotlight

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.

Continually evolving
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.