NIC Notes

Insights in Seniors Housing & Care


By: Jane Adler  |  October 18, 2019

Beyond Demographics: Factors that Impact Demand

Economic Trends  |  Market Trends  |  Senior Housing

Supply follows demand. Or that’s how the thinking goes.

So it makes sense that aging baby boomers—76 million Americans—represent a huge opportunity for the seniors housing industry. After all, they’ll need an age-appropriate place to live.

But demand for seniors housing is much more nuanced than raw demographics. Consumer preferences, local market dynamics and other factors play a big role in how much, and what kind of seniors housing will be needed in the years to come.

A panel of experts at the 2019 NIC Fall Conference took a deep dive into the factors that impact demand trends and development cycles. They agreed that baby boomers will create more demand for seniors housing in the years ahead, though a large amount of new supply may not be needed for another decade. Panelists also weighed in on demand drivers such as local market differences, the importance of branding, and the aging stock of existing properties.

“The long-awaited crush of baby boomers is already here,” noted panel moderator Susan Barlow, co-founder and managing partner at Blue Moon Capital Partners, an investment fund based in Boston. “They’re helping their parents select seniors housing and their opinion counts.”

NIC Senior Principal Lana Peck provided an overview of demand trends. Here are a few key points:

  • The overall occupancy rate for seniors housing (assisted living and independent living) in the second quarter of 2019 in the top 31 primary markets was 87.8 percent, the lowest since 2011. Independent living was five points higher (90.2%) than assisted living (85.1%).
  • Second quarter occupancy in local markets varies widely from the highest, San Jose (95.7%), to the lowest, Houston (81.1%). Rent growth also varies, but hovers around 3%.
  • Absorption of new inventory is ramping up while new construction, especially of assisted living, appears to be slowing.

(NIC third quarter 2019 data show similar trends.)

What’s Ahead?

Peck previewed new research on demand trends which was detailed in NIC’s October Insider newsletter.

Looking at age 80-plus households, factoring in a penetration rate of 18%, the study projects that an additional 881,000 units of seniors housing inventory will be needed between 2019 and 2030. But, Peck noted, the demand hits at different times. Fewer units will be needed in the near future than were produced in 2018. The most units will be needed between 2030 and 2040 (105,000 units annually).

Panelist Gleb Nechayve provided insights on market selection. He is senior vice president, head of research and chief economist, Berkshire Residential Investments, Boston. He argued that it’s not if market selection matters, but how it matters.

Unlike other commercial real estate asset classes, seniors housing lacks some fundamental research on market selection and property performance. “Understanding differences in risk-adjusted returns across markets is critical to market selection,” said Nechayve.

Based on NCREIF and NIC MAP data, Nechayve made some observations:

  • Markets with high occupancy tend to have higher rent growth.
  • Higher demand usually accompanies higher supply growth.
  • Markets with supply constraints tend to have higher occupancies.
  • A concentration of wealthy seniors and adult children, also with a high level of education, contributes to positive property performance.

Blue Moon’s Barlow addressed consumer trends that influence demand today and going forward. She noted that baby boomers, especially adult daughters, are already impacting their parents’ housing decisions. Healthcare integration is important, especially for families who live far apart. Creating a sense of community is a way to differentiate a property.

As an example, she cited a Blue Moon financed project in Denver. The new property will sit at the center of the city’s Jewish community, providing housing options for elders in the area.  “The developer is building something that is an asset to the whole community,” said Barlow.

Where would the panelists buy land for a new senior living development?

In the near term, panelist Nechayve said the best spots are those similar to the ones already succeeding, places with a well-educated population with high incomes. “That’s where to concentrate,” he said. But he cautioned that future demand will likely come from elsewhere.

Peck noted, “We could see something very different in 10 years.” While demand will increase, much of it will likely come from middle-income seniors. NIC recently released the results of a study, “The Forgotten Middle.” It details the growing need of this group for moderately-priced housing options.

Another demand factor to watch is building obsolescence. Seventy percent of the seniors housing stock is 20 years old or older, said Nechayve. “There’s tremendous opportunity for new development to replace those properties in major markets.”

Peck noted that the “sweet spot” for building occupancy is in the 10-17 year age range. That’s when operators have mastered efficiencies and have learned how to maintain resident satisfaction. “The communities are institutions in their neighborhoods,” she said.

Barlow remarked that Blue Moon capitalized three older assets last year and they’re among the best performing properties in the portfolio. “It’s what goes on inside the four walls that counts,” said Barlow. “The properties are known in the community as the best place to live.”