How To Fix Senior Housing’s Affordability Problem

The moment a family member needs to consider moving into an assisted living facility is typically stressful and emotionally fraught. It can be compounded by financial worries or lack of suitable options, a situation unfortunately that more and more seniors are facing.

In the second quarter of 2023, the average asking rent for senior housing for 31 primary markets tracked by NIC MAP Vision, an affiliate of the National Investment Center for Seniors Housing & Care (NIC), was $5,031, a 5.7% increase from one year earlier, marking the highest year-over-year increase since this data collection began in 2006. Meanwhile, inventory for the same markets grew by only 1,128 units in the second quarter of 2023, which was the lowest level observed since the beginning of the time series in 2006.

A study by NIC and NORC at the University of Chicago, published in 2019 and titled The Forgotten Middle, predicted by 2029 there will be 14.4 million middle-income seniors in the US — more than half of whom will be unable to afford private-pay senior housing.

“We will see a very significant group of seniors needing these types of facilities soon and many not being able to afford them,” says Rick Swartz, senior managing director and co-head of JLL’s National Seniors Housing platform.

As with multifamily, there has been a push among senior housing developers to build class A luxury facilities. But where does this leave middle-class seniors who cannot afford to live in these communities? There are no easy answers.

A perfect storm of factors has led to the situation: from the demographics of an aging population, a slowdown in new construction, a rise in operating costs and a resultant reduction in margins.

Challenging conditions for the real estate industry as a whole have not helped. “Developers are becoming more aware of the problem, but the spike in interest rates isn’t helping. Developments for the middle market were already difficult, but the finances are making it more so,” says Caroline Clapp, senior principal, research and analytics, at NIC. “It will take longer to get new supply because of the interest rates.”

NIC MAP Vision’s 2Q23 Senior Housing Market Fundamentals Data reveals that the second quarter of 2023 had the lowest amount of inventory delivered ever. In the past 12 months of the 31 largest metro areas, nine had negative inventory. “So we have construction declining, inventory declining, a lot of the existing inventory is 25 years or older, and then the cost of rates,” Clapp says.

A big component of the rate is the care services that need to be provided. “Some organizations are attempting to meet the middle markets, providing base level of housing and some dining, and a care coordinator who helps with insurance and Medicare. Some will partner with an outside care provider to provide additional care services; they charge as needed,” Clapp says.

Senior housing rent is on average $5,000 per month in the US, but it’s higher for assisted living due to the higher need for care ($6,300) while it’s $4,000 for independent living, she points out.

Housing equity is a major factor determining affordability. “There is a general sense of nervousness out there that if seniors are not able to sell their homes, it will impact what they can afford and whether they can afford the private pay rate that’s out there,” says Ryan Brooks, senior principal, healthcare strategy, at NIC. “Operators need to understand if they can bring the price point down, they open up a much larger market size they can serve. Of course, that’s not so easily done — this is the key challenge. Operators and investors need to decipher how to manage health care components, as they’re the most labor-intensive aspect.”

Pricing and availability depends on where you are in the country, however. It is not a uniform picture nationwide. In New York, for example, there are fewer beds and higher prices than somewhere like Florida where there is a lot of competition. There are shortages of facilities in midwestern states like Kansas and Oklahoma, whereas there is more availability along the Eastern Seaboard and in California and Texas.

“Everything comes down to the population of the 70+ seniors, the income they have and the number of beds in the area that’s available to them,” says Ken Carriero, senior vice president at Colliers in Clearwater, Florida. “Each region is different, and each situation is specific to location. I look at what’s available in a 20-mile radius.”

Some places have done a better job at providing support for middle-income senior housing, and that also makes a difference.

“Penetration rates is one way we look at the acceptance level of senior housing,” says Clapp. The average penetration rate for senior housing in the US is 11%. In Los Angeles, for example, it is lower, while key cities like Seattle and Minneapolis have higher rates. As a state, Oregon has also offered a lot of support for the middle-market senior, Clapp says, so there is a better situation there.

Government subsidies, like Medicaid programs that support assisted living, have been effective in areas with seniors with more modest incomes and some have called for this kind of support to be expanded. Public-private partnerships with developers and tax credits could also help, says Clapp.

Swartz of JLL believes it is more of a rental rate issue than one of absolute supply, however.

“There are some supply constrained areas with barriers to entry including site availability and/or zoning regulations. But very rarely does the demand out strip supply; the development community can usually find a means to meet the demand in an underserved area. Towns typically don’t want senior citizens to have to leave their community. There’s strong political support for senior housing so we haven’t seen in many cases where this barrier is really a big issue. However, in an affluent area, the land prices are often particularly high and because of density may require structured parking, which raises the cost of development, which will in turn increase the rental rates needed to support it,” he says.

“There are a lot of older vintage projects that will be selling at a significantly reduced cost per unit, which would allow owners to charge lower rents to support their investments. But still a large component of rent goes to operating expenses which limits how far such rents can be reduced,” he says.

One solution could be to acquire an older product which has a lower basis per unit. Also, smaller units, double occupancy and set-ups with shared bathrooms, for example, could reduce the operating expenses to provide a more affordable product. Benchmark Senior Living is one provider that has taken this approach with their facilities called the Branches and reportedly have been able to reduce rents by as much as 20%.

A few signature projects are aimed squarely at the middle class and may provide a template for others to follow. One that is attracting attention is the Opus Newton development in the Boston area, created by the nonprofit 2Life Communities specifically for middle-market seniors.

“Addressing the housing shortage is one of the greatest issues facing older adults and their families. For seniors who rent, Massachusetts is already the most expensive state for independent living. In response, 2Life developed a community for people in ‘the forgotten middle’—seniors who don’t qualify for subsidized housing and are uncomfortable with luxury or high-end options,” says Lizbeth Heyer, vice president and acting CEO of 2Life Communities.

The development’s 174 apartments were already 95% pre-sold before the groundbreaking in March 2023, and the remaining apartments have since been reserved.

Monthly rents will be low as $1,800, less than half the average rate at comparable independent living communities in the Boston region. The rates are made possible by adaptations to the standard senior living model, such as serving group dinners only three nights a week and requiring residents to volunteer 10 hours a month.

“The Opus pricing model offers more moderate upfront fees and is focused on keeping monthly fees low,” says Heyer.

Among Opus’ innovations is its integration of housing and healthcare. Supported by a team of “care navigators,” advocates, and providers, Opus residents will receive care directly in their apartments, avoiding costly transportation fees and prioritizing accessibility. This approach also allows for offering care in smaller increments of time, thereby saving costs.

Opus also makes a point to locate in vibrant neighborhoods where amenities can be shared. For example, Opus Newton is connected to 2Life’s Coleman House and situated near the Jewish Community Center of Greater Boston, which allows residents of Opus and Coleman House to use the amenities of both locations.

“The Opus model is entirely sustainable and replicable,” Heyer says. “We hope the Opus model will be replicated by like-minded organizations across the nation and we can provide guidance to any organizations that want to recreate the model in their community.”