Investing in Senior Living Facilities

6 min readJul 23, 2019

This learning series on Modern Commercial Real Estate Investing first appeared on the EquityMultiple blog. Please check in there for updates and additions to this series.

What are Senior Living Facilities?

Senior living facilities, or “assisted living facilities” (ALFs), are private facilities that provide long-term and live-in care for individual patients, particularly seniors who require heightened physical care, medical attention, and recuperation. The staff of a typical ALF will include medical professionals — live-in nurses and doctors who provide health-related care for the residents — as well as administrators, activity directors, and maintenance crew.

Senior living facilities can vary significantly with regard to location, vintage, and property management. The facilities may be directly connected to a hospital or nursing school, from which the medical staff members come for training and professional work. ALFs can also be operated by a private company employing licensed healthcare professionals. This article takes a closer look at the particulars of investing in senior living facilities.

Primary subtypes of Senior Living Facilities

There are four primary subtypes of ALFs: independent living, assisted living, nursing care, and memory-care [1].

Independent Living: As the name suggests, this subtype of ALF is least restrictive, least intensive in care, and resembles other types of communal residential properties. Given the less intense level of medical care required, independent living is the least expensive for residents and is ideal for seniors with less severe medical conditions. Due to the emphasis on quality of residential experience, independent living institutions can be organized into townhouses, cottages, apartments, or small houses.
Assisted Living Facilities are a level above independent living in terms of intensity of the medical care. Consequently, they are typically more expensive for residents. Assisted living facilities offer both residential and healthcare-related assistive services, and typically situate residents in apartments.
Nursing care facilities, often called “skilled nursing facilities”, cater to residents with acute medical needs, such as stroke or neurodegenerative disease. About a quarter of residents in nursing homes stay for less than three months.
Memory-Care facilities specialize in providing catered care for seniors diagnosed with Alzheimer’s and other forms of dementia. Nurses who are qualified and responsible for patients in memory-care facilities are technically and professionally distinct from those in normal assisted living facilities. Memory-care facilities further require experienced operators to oversee and maintain a safe environment for the residents. For these reasons, the tuition and premiums for memory-care facilities are considerably higher than those of general assisted living centers, and the facilities have higher revenue and profitability potential than other forms of ALFs.

While prospective residents primarily consider the quality of medical care in evaluating an ALF, service providers are becoming more aware of the importance of social and psychological care. They emphasize enhancing residents’ quality of life by creating a cohesive social environment, and encouraging social participation and family involvement, organizing social events, family visits, exercise, and other forms of recreation to ensure resident satisfaction and increased length of stay. Effective senior housing investment entails intimate knowledge of the facility and business plan.

Why Investing in Senior Living Facilities Makes Sense

In the past several years, senior living facilities have emerged as a high-performing commercial real estate asset class. The total market capitalization of ALF and senior housing investment is estimated at over $250 billion [2]. This success, and increased interest from institutional real estate investors, is driven primarily by demographic trends among elderly Americans.

The Baby Boomer Generation — those Americans born between 1945 and 1964 — is now the largest population cohort in the United States. This demographic of 76 million Americans represents an extraordinary increase in the number of elderly citizens and, as many economists and sociologists believe, a major change in the national economy and healthcare system. Harvard University’s Joint Center for Housing Studies (JCHS) published a 2018 report detailing the economic and administrative effects that will come from an older national population, the so-called “Silver Tsunami” of the baby boomers. The study found that 55% of American households (65 million) are headed by someone over the age of 50, while the percentage of households headed by baby boomers aged 65 to 74 has increased by 26% since 2011 [3].

Independent of the general population trend, problems related to homeownership among baby boomers are driving increased demand for ALFs. According to the same JCHS report, nearly one-third of all American households that are headed by someone aged 65 or older are considered “housing cost-burdened,” signifying that more than 30% of the household’s income was spent on costs related to the house; of this larger group, more than half of the households were considered “severely housing cost-burdened,” spending over 50% of their income on housing costs.

Improved life expectancy, as well as advancements in medical technology, could make senior living investments increasingly profitable in the future. Over the past sixty years, life expectancy for the average American increased from 68 to 78 years, and the life expectancy for Americans who reach 65 years old grew from 14 to 19 years [4]. Seniors are living longer, even with debilitating illnesses. Longer lives and a growing elderly population mean more demand for ALFs going forward, and progressively greater opportunity for investing in senior living facilities.

Economic reports and statistics on the real estate market for ALFs further support the investment thesis. Due to the essential nature of live-in healthcare and the aforementioned demographic trends, ALFs present a recession-resistant investment opportunity. During the most recent recession, ALFs weathered the storm better than other core CRE asset classes. Since the mid-’90’s, total returns for senior housing have exceeded those of core CRE asset classes: for the years 2007–2017, annualized total return for senior housing was 14.7%, compared to 8.1% for apartments and 8.3% for industrial space, per NCREIF indices [5].

An important data point to consider for understanding the ALF market is the occupancy rate, a figure that reflects the balance of supply and demand. The National Investment Center for Seniors Housing & Care (NIS) — a non-profit organization that performs research on ALF investment activity — reported that the national occupancy rate stayed stable at 88% for the fourth quarter of 2018 [6]. During the same quarter, growth in occupied units caught up to growth in newly available units for the first time in over three years, indicating increased demand for rooms in the facilities.

Senior living facility investments are typically made after the facility opens. The investment will bridge the Property during its lease-up period (typically 12–18 months) until stabilization. At this point, the Department of Housing and Urban Development (HUD) provides a public service via cheaper loans to the senior living facility to help maintain the business plan and refinance prior investments. Through this program, known as Section 232, HUD provides mortgage insurance on loans that cover senior living facilities, including ALFs and nursing homes. To qualify for HUD loans under Section 232, the facility must be fully licensed, contain at least 20 units, and be operational for at least three years. Upon qualification, the HUD loan will cover the lesser of either 100% of the cost to refinance or 85% of the appraised value. For the loan to be provided, the facility must have a Debt Service Coverage Ratio (DSCR) of greater than or equal to 1.45x [7].

To learn more about Section 232, visit hud.gov. When ALFs reach stabilization, they are incentivized to refinance with a HUD loan. EquityMultiple seeks senior living investment opportunities that meet the following criteria:

The senior living facility has been in existence for more than three years;
The property is not fully stabilized;
The senior living facility has strong potential for enhanced profitability through strengthened management and renovation.

To learn more about investing in senior living facilities, and other CRE investments on the EquityMultiple platform, please schedule a call to speak with our Investor Relations Team.

Sources:

Investing in Senior Living Facilities

What are Senior Living Facilities?

Primary subtypes of Senior Living Facilities

Why Investing in Senior Living Facilities Makes Sense

Written by EquityMultiple Team