Breaking through market uncertainty: Navigating the nuances of seniors housing investment

The asset class is ripe with opportunity, and it is undeniably an exciting time. However, the seniors housing sector is also evolving alongside development challenges, macroeconomic uncertainty, threats to Social Security and Medicaid, and elevated interest rates. While the demographic fundamentals of the nation’s aging population are driving opportunities for investment, investors need a solid strategy and a team of financial advisors to navigate the market turbulence. 

Supply-Demand Imbalance Drawing Investors, Need for Development

Seniors housing assets are slowly clawing back from an unprecedented juggernaut of occupancy declines and compression of margin to razor-thin levels. Despite clear demand drivers and operating now outperforming market expectations, new construction starts for seniors housing and skilled nursing have yet to rebound to pre-pandemic levels. As a result, demand is rapidly beginning to outpace supply. According to an article in Senior Housing News,² “If the industry does not increase its investments in senior living development by at least 3.5 times faster than its current pace, a $275 billion development ‘supply gap’ will emerge by 2030.” The article further notes that average occupancy is expected to reach 90% by 2026 based on levels of current unit absorption.

In the short term, this dynamic is creating a healthy investment market with the potential to produce attractive returns for new and existing investors. In the long term, however, the lack of new development is poised to create an alarming imbalance of supply and demand, and it will further exacerbate the nationwide housing crisis — a scary situation for seniors in need of assisted living, particularly those with middle or modest income. Market fundamentals should support more development, but high interest rates and economic uncertainty have impeded new construction dollars from reaching projects. Seniors housing construction starts in the top 31 MSAs as analyzed by NICMAP Vision were at 1,076 units for the first quarter of 2025, which marks the lowest count since the second quarter of 2009, the aftermath of Global Financial Crisis. Further, the underwriting metrics for new development warrant above-market rental rates for units that attract financially strong seniors, leaving many Americans priced out. With bright and innovative experts focused on this issue, I’m optimistic about the innovation spurring the seniors housing industry to tackle the affordability crisis. Addressing the supply-demand imbalance at scale will require not only new ideas but the entry of new investors and new sources of capital.

The active adult sector is an ideal entry point for developers and investors to enter the seniors housing market at a lower cost per unit. According to the U.S. Census, seniors aged 65-74 are the fastest-growing group of renters in the U.S., illustrating the broader demographic shifts as the baby boomer generation ages. Active adult community operators have been able to capitalize on the trend of retirees seeking adventure by promoting safety and security in a community with like-minded neighbors. Active adult living is often a senior’s first step out of their long-time home — a challenging transition. Creating a specific property profile for this demographic will significantly contribute to the increase of the overall market penetration rate for seniors housing as this population ages.

Solving the Equity Puzzle

The fundamentals of the seniors housing sector are exceedingly positive, but today, putting a capital stack together presents challenges to investors.

The pandemic fundamentally changed the seniors housing investment equation. Before 2020, seniors housing projects reported year over year a high internal rate of return (IRR), and investors would simply recycle capital into new projects at high leverage. Then, during the pandemic, assisted living facilities and nursing homes were severely impacted by COVID-19 outbreaks. Suddenly, investors motivated by IRR metrics who had locked in long-term variable-rate debt were not seeing the same returns. Rising interest rates and economic uncertainty caused further disruption, triggering the need for large capital calls for operating costs and debt service payments. As a result, returns on higher-leverage real estate were not realized, or it took longer to achieve targeted outcomes. Now, lenders are requiring more equity for seniors housing deals, but historically, the depth of seniors housing equity has been shallow. Many operators in the industry have traditionally been funded through friends and family equity, slowly building ownership and control. The prevalence of private equity has started to shift that dynamic.

Piecing together enough equity to make a loan work in today’s market can be difficult — even with such attractive demand-side fundamentals. Headlines from NCREIF that investors are beginning to see outsized returns and attractive financing should continue to draw new entrants to the seniors housing industry.

Thankfully, the tailwinds on the financial front are strong. At KeyBank, we have seen an increase in balance sheet activity as well as off balance sheet loan placement with traditional partners like Fannie Mae, Freddie Mac, and HUD, and have welcomed the entrance of new lenders and life companies. New capital is flooding into the sector, creating more avenues to finance development, acquisition, and refinancing of seniors assets. KeyBank works with several national life insurance companies and pension funds that are increasing allocations to their overall real estate mortgage secured portfolios by 4% or 5%, a significant uptick within this commercial real estate subsector. Plus, the decrease in stabilized office assets has created opportunities for seniors housing to fill a portion of the gap at higher returns.

To take advantage of these opportunities, new entrants, whether lenders or equity investors, need a strong and seasoned financial partner on the capital side with an expertise in seniors housing to navigate the complexities. At KeyBank, our approach is unique but effective. A dedicated life insurance-focused professional works closely with an expert on the seniors housing team to educate new capital providers as they underwrite and navigate reimbursement rates, typical margins, and insurance costs, all considerations central to any seniors housing transaction.

Not So Niche

The spotlight on seniors housing is exciting as more resources become available to the sector. As an active contributor to the advancement of the seniors housing sector, I am encouraged by the expansion of lenders funding capital for operations, the expansion of next-generation bankers who have also chosen to specialize in healthcare and by the continued commitment of my operating peers to seek new avenues to build communities that will serve middle America.

With the expectations of high returns for the sector and the undeniable demand metrics, the industry seems to be transforming from a niche subsector of residential investment into a dominant real estate class.

Connect With Us

To discuss the current market environment and what financing options are best for your next seniors housing project, connect with Morgin Morris or Matt Ruark or reach out to your KeyBank mortgage banker directly.

Learn More

Visit www.key.com/rec, where you can find our expertise in multifamily, affordable, CRE market commentary and more.