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Has seniors housing become a core investment? The short answer may be, “It’s getting there.”

The seniors housing sector has evolved from a niche segment driven by regional owner-operators to a sought-after holding by generalist investors. However, greater transparency on the operations front is needed for the sector to fully realize its investment potential.

During the 2018 National Investment Center (NIC) Fall Conference, the seniors housing and care sector’s premier annual event, I participated on the panel, “Investing in Senior Care: Past, Present & Future” with colleagues representing seniors housing owner-operators, real estate private equity, public equity, real estate assets consulting, and pension fund advisors.

We discussed the increased sophistication of seniors housing sector investors, as well as operational challenges, performance, changes in deal structure, and what we believe trends over the past 10 years tell us about the future.

We also talked demographics. The much-anticipated “Silver Wave” of baby boomers who will need seniors housing is still in their early 70s now and most are not yet in need of assisted care. The Baby Boomers will not make a profound impact on seniors housing demand for nearly another decade. In the meanwhile, owners and operators are working to position their brand today to serve the existing elderly population while renovating for the future.

Investment Trends: Institutionalization of the Sector

While seniors housing, according to 2018 NCREIF data, has outperformed many other commercial real estate lines of business over the past 10 years, the operations-driven nature of the business makes it a more complex asset class for investors.i For the investment community to fully embrace seniors housing, we need investment in software and technology to increase transparency and create overall stronger education programs to inform the broader public about the sector.

Ancillary property types are becoming more common within the real estate institutional investment world. However, the main difference between seniors housing and multifamily, a strongly favored asset class over the past decade, is the greater effect of management on an asset’s net operating income (NOI) and return on investment (ROI). Assisted living, Memory Care and Skilled Nursing communities don’t simply provide a self-contained unit and self-serve amenities but must offer trained staff, specialized spaces, and meet more stringent state and federal regulations – all putting a premium on the cost of the investment.

Today there are more core funds in seniors housing than there were even five years ago, and as institutional investors find more experienced managers to partner with and realize the durable income streams seniors housing produce, even greater capital flows will enter the space, especially as investors continue to look for diversification strategies.

Operational Trends: Meeting the Challenges

Looking at capitalization (cap) rates for the sector, they are constricting.  In looking at an independent/assisted living deal: Ten years ago the cap rate was 8 percent, 5 years ago it was 7+ percent, and today it falls in the high 6 -7 percent range. While my fellow panelists didn’t expect it to go down more, returns are without a doubt being impacted by challenges on the operations side of the business.

In the third quarter of 2018, occupancy rates for seniors housing fell to a seven-year low of 87.9 percent. This low revenue, coupled with rising wages for skilled labor, means that NOI growth will be difficult for many operators over the next 18 months.

Independent living and assisted living owners also face the challenges of attracting new residents who are ready to consider independent or assisted living earlier in life. The differentiator for them isn’t care – which is expected – but lifestyle offerings such as amenities and community. Some owners are also expanding their revenue streams from the private-pay model, accepting assisted pay through Medicare programs and expanding into home health or PACE (Programs of All-Inclusive Care for the Elderly) grant programs.

As underwriters, we’re taking these stresses on revenue – such as rising food cost, labor increases, and real estate taxes – into account and modeling around a flat NOI point. However, all markets are not equal. There’s a great discrepancy between larger markets with newer stock, as compared to smaller markets offering vintage properties with significant deferred maintenance, and plummeting occupancy.

Property Trends: Evolving with a Changing Customer

Property obsolescence is an interesting hurdle for the seniors housing sector as buildings continue to age and resident’s expectations evolve. According to NIC, two thirds of current properties nationwide were built before 2001.ii

Newer properties have to address the changing needs of customers to maintain occupancy. To make younger, more active residents feel like they’re not in a clinical setting, facilities should offer affinity group living, more sophisticated shared activities and amenities, flex spaces, varied dining venues, and therapy spaces that outside providers can use. Customers are also seeking larger units with more storage as they move out of their single-family homes. On the new development front, we should see a shift toward mid-rise and high-rise communities in large metropolitan markets with greater demand.

Technology is another differentiator. Owners must address an increasingly tech-savvy senior population with technology such as high-speed WiFi, smart home capabilities, and personal health monitoring devices. At the same time they can use advances in technology to streamline staffing and property management, improve energy efficiency, and track residents’ needs.

How the Marketplace and Deal Structures Have Evolved

In the 1970s the IRS initiated a set of reforms to distinguish elderly housing as it related to tax and revenue purposes. These reforms created the initial framework for financial institutions and many government agencies, including bank regulators on how to define and ultimately lend to seniors housing developers.

Lending in the 1970s and 1980s was dominated by smaller banks, and bond programs.

With the shift in the late 1980s and early 1990s to offer more Independent and Assisted Living options, you had the emergence of specialized seniors housing lenders at Fannie and Freddie as well as a number of national and regional banks forming specialized groups. Another notable shift in the space was in the late 1990s and early 2000s when more diverse investors started exploring the senior housing space offering more sophisticated debt structures and equity options.

Post-recession noted the continued expansion of specialized lending shops and lines of businesses within traditional banking. The recession played a role in solidifying the capital in the space. Today, looming demographics are going to continue to push new debt players into the space, chasing its compelling returns.

Over this financial evolution, underwriting has grown more disciplined because of the wealth of information about occupancy and operations expense trends, more investors with experience in the sector, and the ability to look at past performance.

Over the course of the last 20 years, several disruptors have emerged on the debt side. In addition to more traditional banks, FHA and agency lenders and life companies have grown in number offering competitive pricing and aggressive structure. Now, with the emergence of debt funds coming into seniors housing, banks are being pushed to offer competitive low, non-recourse pricing. It’s important to work with a Lender that can offer you a variety of options.

What if the Market Has a Downturn?

Some economists are bracing for a downturn in the commercial real estate market after a decade of recovery and growth as reported by Fortune and The Economist.iiiiv Any economic change would affect the sectors of CRE, but the question would be how seniors housing would perform relative to other asset classes.

Looking at NIC data, seniors housing was the only asset type that demonstrated a 10 percent or more return at the depths of the last downturn in 2008. Additionally, though occupancy declined, seniors housing did better on an occupancy basis than rental housing, and rent growth was slightly positive.

It is appropriate to predict that with any recession, seniors housing (once again) would outperform other real estate classes, if not for demographics alone. The only looming question that remains, is how to make seniors housing affordable for the next generation and how to improve the stagnant penetration rate.

Investor Interest is High – Now the Sector Must Rise to Meet Institutional Expectations

Seniors housing investment offers a compelling case with strong investment return. The National Council of Real Estate Investment Fiduciaries (NCRIEF) Property Index (NPI) shows on a 10-year basis, 10% returns compared to a national NPI of 6%. New sources of capital are coming into the sector, chasing returns and diversification, and owner-operators must make a case for how they’ll manage operational challenges, such as rising labor costs, occupancy rate declines, and aging properties.

KeyBank’s Healthcare Finance specialty offers a dedicated, national team of seniors housing and care investment experts who understand the complex financing and operational needs of the sector. To learn more, connect with your KeyBank Healthcare Finance manager, or reach out to me directly at


NCREIF Annualized Total Returns By Property Type. National Investment Center for Seniors Housing & Care (NIC), March 2018.


Valued Data for Skilled Nursing Investors and Operators. NIC.


Kelleher, Kevin. “U.S. Economy Will Slow in 2019, May Enter Recession in 2020, Economists Forecast. Trump Administration Disagree.” Fortune, November 2018.


Avent, Ryan. “Another Economic Downturn is Just A Matter of Time.” The Economist, October 2018.

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This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.