REAL ESTATE NEWS

The pandemic brought new senior housing development to an abrupt halt—but the silver tsunami didn't stop. Every day, more than 10,000 baby boomers enter retirement age, and many begin to need supportive services and supportive housing. The dynamic has created a severe supply-demand imbalance in the sector. Occupancy rates are now above 90% in all major markets and rents are growing 4% or 5% annually, with pricing power in the hands of operators.

While the fundamentals are attractive to investors and operators, the severe lack of supply is affecting the middle market, says Matthews senior housing specialist team Matthew Wallace, SVP; Noah Lindon, senior associate; and Jonah Yulish, first VP and director. In response to the building demand, the team says that institutional capital is stepping in.

Low Supply Squeezes Middle Market

The rent appreciation of 4% or 5% per year is very difficult for the middle-market residents and middle-income seniors to absorb, but with the pipeline drying up there is limited new supply to help bring down the cost of senior housing.

"Rent increases have slowed a little bit from 2023, when rents were rising at 7% or 8% annually, but a 4% or 5% annual increase still isn't something that middle markets can handle," says Lindon.

The team sees the rising popularity of asset classes like active adult living as a response to the supply crunch. The rents in active adult communities are lower than in senior housing, but they don't offer that higher acuity care that many seniors need. "That's where we are running into an issue," adds Lindon.

Wallace says that an asset class that blends senior housing services in active adult communities is emerging to help fill in the gap, but even then, operators will face labor challenges while also providing a lower level of direct care for residents. This is the biggest challenge in senior housing today—but Wallace also sees it as an opportunity.

"If you can create an efficient level of care that can satisfy that middle market, that's a huge opportunity over the next 10-plus years," he says.

Institutional Capital Joins the Conversation

Active adult communities are one solution, but institutional capital is another answer to help fuel development and create more supply. In response to the combination of high demand and strong fundamentals, institutional capital is more frequently partnering with local operators and developers that can offer a high level of senior housing expertise.

"Smart money is pairing with best-in-class operators, right? It is definitely a more niche asset class that requires a higher level of expertise," says Lindon. "Institutions are making sure that their operators have skin in the game and are operating at the highest level, but operators are also looking to expand their platform by partnering with institutional capital." It's become a winning scenario to have partnerships that are both well capitalized and have deep experience.

As Wallace says, "these are big bets. You can't make the wrong move."

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Source: GlobeSt/ALM