Supply-Demand Imbalance Shapes Senior Living Investment Landscape

There are two dynamics meetings in senior housing, according to a recent report from Walker & Dunlop. One is the growth of the market. The other is that in multiple ways the industry still lags where it was before the pandemic.

The rapid growth of the aging population isn’t exactly a surprise. NIC MAP Vision, a company that provides geospatial and market selection analytics for the senior housing and the care sector, said the current senior housing development pace indicates a 550,000-unit shortfall by 2030, representing a $275 billion investment shortage.

Walker & Dunlop quoted some figures from Green Street indicating a base case of 3.10% annual growth in supply but 4.60% in demand. By 2050, the estimate is that 20% of the population will be at least 65 years old. In 2023, the 80-plus population grew 4.4%, the highest level in 52 years, Walker & Dunlop claim.

The differential is creating a supply and demand imbalance. In the first half of 2024, total senior housing transaction volume was $3.5 billion, a 32% year-over-year decrease. That was due to multiple factors like transaction activity slowdown and the impact of distressed asset sales, which lowers the dollar measure. Quarterly transaction averages from 2014 through 2019 were $4.4 billion. From 2020 to 2022, that dropped to $3.7 billion, then $2.7 billion in 2023, and $1.8 billion in 2024.

A 202-to-2023 comparison shows valuation declines across property classes. Per-NOI across property classes were $16,800 in A class, $10,200 for B, and $7,600 in C. Operating margins for the three classes were, respectively, 22.8%, 16.1%, and 15.0%. Occupancy rates were 86.8%, 78.1%, and 84.3%. And average cap rates were 8%, 8.5%, and 11.3%.

Broader economic conditions over the last few years have affected investment in senior living, particularly in the assisted living (AL) and independent living (IL) segments.

Financial performance in the first half of 2024 was mixed. Margins have improved but they are still lower than during pre-pandemic times. Rent growth has been an important factor in margin improvement. However, rising costs are the reason margins still have a way to go.

From a capital market view, incremental pay-downs are freeing capital that will enable new lending. There is increased interest in senior housing given challenges in other asset classes like office and multifamily. The moderation of long-term interest rates will create a more favorable borrowing environment. There is also a shift in financing sources from banks, which are seeing greater capital efficiency in increasing warehouse lending efforts.

While there are tailwinds from resilient demand, a big upside, and increased efficiencies, there are such headwinds as an ongoing labor shortage, vulnerability to NOI growth because of labor costs and long-term capex needs, and more options available to healthier adults.