The graying of America

As the US baby boomers retire, the senior housing sector is drawing renewed interest from investors. But as many learned in the 90s, senior housing isn't your typical real estate play. By Dave Keating

Victor Regnier knows senior housing. As a professor of architecture and gerontology (the study of the elderly) at the University of Southern California, Regnier specializes in the housing needs of the aged. He believes that within the next 10 years a senior housing boom is all but a certainty.

“We are coming into an era where we have a huge number of Boomers—people born between 1946 and 1964—who everyone is anticipating will change the face of senior housing,” he says.

Today people over 50 make up the fastest growing segment of the US population. The Bureau of the Census projects that seniors will account for nearly 20 percent of the US population by 2030, up from less than 13 percent today. The transformation of senior housing from a niche area to a major piece of the housing market is quickly approaching, and with significant unmet demand in the sector, many investors, from publicly traded REITs to private equity firms, are lining up to try their luck.

“We are coming into an era where we have a huge number of boomers who everyone is anticipating will change the face of senior housing.”

In May, NorthStar Realty Finance entered into a joint venture with Chain Bridge Capital to form the US senior housing investment vehicle Wake Field Capital. Alternative investment firm Fortress Investment Group recently sank $1.3 billion into Brookdale Senior Living's acquisition of American Retirement Corporation, making Brookdale the largest senior living operator in the United States. And Chicago-based private equity firm Madison Dearborn has emerged as the front runner in the race to acquire Canadian nursing home operator Extendicare. In addition, many Canadian REITs, including Chartwell Seniors Housing and Lanesborough, are heavily investing in the sector.

Relative to the US, Canada is expected to see as much, or even more, growth in its senior population. Arni Thorsteinson, chief executive officer of Lanesborough, has led his firm in a number of recent senior housing deals, including complexes in Saskatchewan, Ontario, and British Columbia.

“We find that the opportunity to achieve higher revenues is very strong in the senior housing sector if you locate in strong growth markets with limited competition,” he says. “We're concentrating on existing facilities that are well-located and relatively new.”

Real estate fund manager AEW Capital Management has been investing in the senior housing sector for many years, including a successful 1997 joint venture with Massachusetts-based Benchmark Senior Living. Dick Burns, chief investment officer of Benchmark, says his decision to partner with AEW, after years of investing in senior living with Morgan Stanley, has paid off.

“I saw the direction of this business, the efficacy of the operating business model in today's world that's awash with capital, and felt very strongly that it was a business that I wanted to be part of going forward,” he says.

Investors now eyeing senior housing may want to look to firms like AEW, who stuck with the sector through its rise and fall in the late-90s, for guidance. As long-time investors in the sector will tell you, senior housing may have a high potential for returns, but it's also extremely complicated. For starters there is a spectrum of sub-classes, ranging from agerestricted, assisted living communities on one end to special care nursing homes on the other. In many ways the two ends don't even resemble one another. Nursing homes, for example, require extensive services for their residents including medical care, food services and emergency precautions. In most states, they also must be licensed. At the same time, they generate much more income while costs are typically much higher, almost twice as much as an assisted living unit. Still, it is a very specialized area of investment. Thorsteinson, for instance, says although nursing homes can generate high returns, Lanesborough won't go near them.

“We wouldn't invest because it's more specialized and management intensive,” he says. “Our background as a REIT is in conventional rental apartments, as opposed to coming in from the medical side.”

Far more interest has been generated in the assisted living area, a relatively new phenomenon serving younger seniors under 75 who don't require extensive medical care but still want to live in a community where activities and services are geared towards active seniors. Demographics favor this area as well, as the baby boomers set to retire will enter this category first. According to recent statistics from the National Investment Center for the Seniors Housing & Care Industry, this independent living sector of the industry has an overall occupancy rate of 92 percent.

But history says investors should proceed with caution. In the late-90s, analysts concluded that 50 percent of the people then living in nursing homes could be adequately cared for at much lower cost in assisted living complexes. Developers rushed in to fill the void.

“There were a number of investors that jumped in not knowing much about the industry,” says Burns. “Everyone looked at the numbers and the unmet demand, but so much came on at once it was impossible for it to be absorbed all at one time.”

The senior housing bubble burst at the end of the decade and led to a tightening of capital and a wave of consolidation in the industry.

Gleb Nachayev, a senior economist with Torto Wheaton Research, advises investors interested in the senior housing sector. He says the biggest problem from the wave of investment in the late-90s was the fact that investors got too easily spooked.

“I think those investors who were able to stay and not turn their backs on senior housing benefited from that knowledge,” he says. “I don't see this as something for the short-term investor. If someone is thinking about getting into this business, they have to understand the nature and be prepared to grow with the industry through its ups and downs.”

Nachayev says any firm investing in the sector today should not exit in any sooner than five years if it wants to take advantage of demographic trends.

“There's this sort of undercurrent in agerestricted housing that what they don't want is age-restricted housing. They don't want to feel like they're in their father's retirement community.”

Dick Burns says success in this business is very dependent on who a firm chooses as its manager. Reputation is everything in senior housing and a bad manager can easily destroy the enterprise.

“Once you get past the basic real estate considerations, the skill of the operator is paramount to the success of the properties,” says Burns. “It's an operating business; it's very people intensive. It's not like an apartment building where you just turn over people that come in, use the unit, and go out. You have residents that demand services, and your business rises and falls on how effectively and economically you deliver those services.”

Nachayev says he tells investors to keep the importance of reputation in mind when making another critical decision: whether to acquire existing facilities or build new ones, since a property's reputation can often survive a change in ownership.

“One of the benefits of buying existing [facilities] is that it's very much word of mouth in terms of [generating] demand,” he says, noting that buying an existing property with a good reputation is an excellent strategy. “But if a property is not doing well even though it's in a good location, it probably hasn't established itself well and it wouldn't be a good acquisition. It might be better off starting from scratch somewhere.”

With so much unmet demand for under-75 senior housing, developers are starting with a blank canvas, which presents an excellent opportunity to tailor the new properties to the particular needs and desires of baby boomers. This can be split into two facets: what they want in their units, and what they want in their communities. Professor Regnier says boomers will want to see the same apartment traits in their old age that they've enjoyed or wanted in their midlife. He says they prefer large two-bedroom units that range in size from 1,200 to 1,800 square feet. These units should be open with few hallways, including one “great room” in the center containing a combination kitchen, living room and dining room. He says the kitchen should receive a lot of attention as well as the bathroom, which should be expansive.

As for community, that gets a little more complicated. After all, this is a very diverse group of people. However, Regnier says his research has established some overall trends.

“Generally they enjoy traveling and learning about new things,” he says. “Not conventional learning like you would in a university, but recreational education where they can enjoy the pleasure of learning new things and applying it in new circumstances.”

Regnier says the biggest thing seniors want in age-restricted housing is activities, such as exercise classes, performing arts or sports. He says he has assisted on a number of projects where the facilities will actually include TV studios. Erickson Retirement Communities, for example, is building TV studios in their new facilities and tying them into their cable TV system, enabling their residents to produce shows for residents not just at their own retirement community, but also at other Erickson locations.

At the same time, Regnier adds that baby boomers have another thing in common: resistance to the very notion of senior living.

“There's this sort of undercurrent in age-restricted housing that what they don't want is age-restricted housing,” Regnier says. “They don't want to live with a bunch of people their own age. They don't want to feel like they're in their father's retirement community.”

That may seem like a roadblock for potential investors, but the good news is they still need housing and they do want to live in a community with specialized activities. Some developers have sought to address this dichotomy by placing senior living communities within larger family residences. Del Webb, a national developer of “active adult communities,” has done this with their Anthem community in Las Vegas. Built in 1998, the 7,000-unit complex lies within a larger development that is targeted toward a variety of age groups. In this context, seniors have exclusive access to facilities and activities that they wouldn't necessarily want to share with teenagers, but still get to be part of a larger community.

New urbanism is another phenomenon being embraced by the baby boomer generation, Regnier says. Many people who have raised their children in suburban enclaves would now rather move back to the center of a city and be near cultural and retail attractions. As cities across the country have undergone revitalization, so has interest in retiring there. Many companies are building retirement communities in places like Chicago, Seattle, and Northern New Jersey. Whereas the previous generation often preferred bucolic retirement settings, Boomers frequently want to be where the action is.

For the last 30 years, California, Arizona and Florida have been the top US retirement destinations. Today, this reality is changing. Regnier says California is now almost out of the picture—about as many people now leave the state as enter because of the soaring cost of housing there. Arizona and Florida are still very popular, but new destinations are also attracting attention such as Nevada, the Blue Ridge Mountain communities in North Carolina, and the hilly areas of Texas. In this decade, the Southern and Mid-Atlantic states will account for 40 percent of the increase in population aged 65 and older, according to census projections. California, Arizona, Washington, Nevada and Colorado will account for another 25 percent.

Yet senior housing development doesn't seem to be following the demographic predictions. Torto Wheaton Research shows that the Northeast and Midwest account for the largest share of the more than 100 senior housing units currently under construction. The West and South are expected to account for more than 75 percent of growth in senior population, yet they account for only 45 percent of senior housing currently being built. In fact, there are twice as many senior housing units under construction today in Illinois as in Florida.

Part of the explanation for this could be that more seniors are choosing to stay put, moving to new facilities in their existing location to stay near family and friends rather than making the move to the Sun Belt.

“They're saying, ‘wait a second, I'd rather stay with my kids and figure out a way to maintain connections,’” says Regnier. “‘But I still want to live in a different place, where I have access to a range of new amenities.’”

Demographic trends outside of North America will most likely not play out in the same way, according to Regnier. The population of Western Europe, for instance, has for the most part already aged. Therefore, the percentage of seniors is not expected to rise significantly as in the US. Nevertheless, the share of seniors in Western Europe is already higher today then in either the US or Canada, and it will remain higher for some time. In 2025 the population over 65 will account for about 23 percent of the total population of Western Europe, versus 18 percent in the US and 21 percent in Canada, according to Torto Wheaton. This fact, along with European benefits systems, which have entitled seniors to longterm care, means the sector in Europe is more developed, with better and more innovative stock. Yet even as US nursing home developers look to Europe for inspiration, it is hard to find many examples of the “independent living” model in the “Old World.”

“A lot of people who have studied long-term care have studied Northern Europe in particular,” says Regnier. “But there haven't been very many age-restricted environments for younger older people. That's something that's never been popular over there.”

All in all, most analysts say Europe is not an attractive candidate for this new type of independent living model. One country that may be a better alternative is Japan, where cultural attitudes toward seniors are quickly shifting. Japan is the most long-lived society in the world, and traditionally seniors have relied on a family system for long-term care. But increasingly, the younger generation does not feel the same obligation to their older peers as previous ones. At the same time, the senior living sector remains very underdeveloped.

“I've looked at a lot of nursing care facilities in Japan, and they're very small, with a lot of four-bedroom nursing home rooms,” Regnier says. “There hasn't traditionally been a strong interest in them, but where it has evolved it's been popular. But the long-term care that is available is very expensive.”

“I've looked at a lot of nursing care facilities in Japan, and they're very small, with a lot of four-bedroom nursing home rooms,” Regnier says. “There hasn't traditionally been a strong interest in them, but where it has evolved it's been popular. But the long-term care that is available is very expensive.”