It sounds straightforward, but one of your avenues for building a retirement nest egg (or building passive income) is investing in senior housing.
From independent or assisted living centers with meal plans and social activities to nursing care or memory care facilities with qualified nurses and doctors on-site, modern, sophisticated companies have improved the wealth of options and quality of care for retirees.
With corporations and institutional investors modernizing the industry, they’ve opened the door for passive real estate investors to buy-in.
But like any investment, you need to understand the risks and rewards before you add this class of commercial real estate to your portfolio.
In this article, we’ll help you understand the upsides and downsides of assisted living real estate investment.
Benefits of Investing in Senior Living Facilities
In the last decade, senior living facilities have generated superb returns on investment.
In PricewaterhouseCoopers’ (PwC) Emerging Trends in Real Estate United States and Canada 2020 feature Senior Housing: An Update, they write, “According to first-quarter 2019 National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI) results, the total return for senior housing on a 10-year basis was 11.73 percent.”
PwC adds that this figure has been, “…far outpacing the overall property index of 8.51 percent and apartment returns of 8.64 percent.”
Lower Risk Through Stability
Three factors make senior housing, in general, a stable investment.
First, unlike younger tenants whose job prospects shift with the economy, retirees count on secure payment sources.
Some seniors pay for housing by withdrawing their retirement or other savings, and many supplement the cost through steady insurance payments or established government programs.
Second, senior housing is a societal necessity.
Unlike a technology that becomes outdated or an alternative foods company that may never grab market share, there will always be a segment of the population who depend on caretaking facilities.
Third, demand for senior housing is unlikely to be affected by stock market swings or unemployment rates.
As PwC put it,”…the sector is not as cyclical as other property types and was shown to be recession-resilient during the global financial crisis (GFC). Its ‘needs-based’ demand characteristics allowed assisted living to withstand many of the downwind recession pressures faced by other commercial real estate sectors.”
Baby Boomers Expected to Drive Demand
In the near future, when the famous baby boom generation reaches retirement age, they are expected to increase demand for assisted living and other retirement and/or care facilities.
According to a report by the United States Census Bureau titled The Baby Boom Cohort in the United States: 2012 to 2060, as of 2029, every baby boomer will be 65 or older, which means over 20% of the entire U.S. population will reach traditional retirement age.
Most senior housing facilities are due for construction updates.
According to PwC’s report, “…with nearly two of every three properties built before 2000, the inventory of senior housing properties is relatively old, and often a property refresh is needed for design, functionality, and efficiency.”
These building updates, by way of value-add improvements, can help increase investors’ profits through forced appreciation. Options include improvements to the grounds or common areas to increase curb appeal, improve usable space, or reduce operational inefficiencies.
Disadvantages of Investing in Assisted Living Homes
Strong Management Required
A solid operator is critical to the success of any senior living facility. On top of the general maintenance, marketing, and leasing duties that come with all real estate management, this class has an extra layer of responsibilities.
While seniors are generally responsible renters, they are a tenant population that requires more living accommodations, including medical care. Many facilities provide doctors and nurses on-site. Mismanagement can lead to damages and lawsuits over poor standards of care.
Before pursuing any senior housing opportunity, the operator must be thoroughly vetted.
While some seniors will pay their rent privately, payments may be covered by Government programs, such as Medicare or Medicaid, or by private insurance.
It can be a long wait to get reimbursed by the insurance companies. Any delays in insurance payments or, in the worst case, unexpected gaps in coverage, can affect investors’ cash flow.
And while Medicare and Medicaid are reliable Government programs, any changes to legislation could affect payments or coverage, causing operational ripples through the business.
Supply and Demand Imbalances
Recent data suggests that inventory growth has outpaced demand, lowering senior housing occupancy rates.
As PwC points out, “In general, demand for the aggregated NIC MAP 31 markets has been solid—just not solid enough to absorb all the new inventory being built.” They add that, even though net absorption reached a record high in Q4 2018, inventory growth was stronger for a longer period.
PwC concludes that, “As a result, the occupancy rate for senior housing stood at 88.1 percent in the first quarter of 2019, a near seven-year low.”
But low occupancy overall doesn’t mean low occupancy across senior housing markets. According to PwC, “Supply/demand imbalances exist in some—but not all—markets across the United States.”
PwC adds that, “….a very wide 13-percentage-point difference was recorded between the occupancy rates for the most occupied (San Jose at 94.4 percent) and the least occupied (Houston at 81.4 percent) senior housing markets, according to the National Investment Center for Seniors Housing & Care (NIC) MAP Data Service.”
Management must also contend with staffing challenges and labor costs.
According to PwC’s report, “Commonly and frequently, operators are reporting labor shortages in all occupations across their operating platforms…” PwC adds that the national unemployment rate reached 3.6% in May 2019, making it harder for companies to retain and recruit employees.
And these labor shortages have driven up wage rates. As PwC puts it, “In the first quarter of 2019, average hourly earnings rose 4.6 percent for assisted-living employees on a year-over-year basis, according to the U.S. Bureau of Labor Statistics.”
Whether these employment trends are long-lasting or soon fade, they show the potential for staffing challenges to raise operating expenses, which could lower investors’ profits.
Invest in Care
The impressive returns, stability, increased demand, and potential for value-add improvements make investing in senior living communities a lucrative option for real estate investors looking to build passive income and/or save for retirement.
And while there are factors that can impact your profits, the transformation of this industry is leading to greater oversight and analysis of investment opportunities, further lowering risk for investors.
In their report, PwC says, “…transparency and understanding of the sector continue to grow, which provides a more knowledgeable and disciplined capital market.” They add, “…banks are paying more attention to market conditions before providing proceeds to borrowers and opportunities are being scrutinized and have been turned down due to market conditions.”
With due diligence and a solid operator at the helm, your opportunity to invest, with care, is open.
At Birchstone Investments, we help investors create passive income streams and grow long-term wealth through strategic commercial real estate investments. If you’re interested in learning more about investment opportunities, join our investor community