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with home ownership rate by age in the United States, which increases significantly as people enter their late 20s and 30s. When people reach their 40s and 50s, the percentage of households living in multi-unit buildings continues to decline, though modestly. However, around 70 years of age, the trend actually reverses. The percentage of people living in multi-unit properties begins to rise again, fairly significantly — from around 19% in their early 70s to approximately 33% for those at the age of 85 or greater. Although some of this increase is due to people moving from detached single-family houses into condos and apartments, much of this increase is attributed to people moving into some kind of senior housing facility. Continually, the age at which this transition occurs is getting pushed back over time — as people are healthier with longer life expectancies they prefer to stay in their house as long as they can. However, declining health will usually force households to make decisions about care for the elderly. Although 20% to 33% of households still represents a minority within those age brackets, demand for senior housing units is going to increase because the size of the baby boom generation is significantly larger than the generation that preceded it. The upswing in the percentage of households living in multi-unit properties beyond the age of 70 is of paramount importance at this juncture because the oldest baby boomers are only two years away from reaching that age milestone. Beyond that point it is increasingly likely that they will require assistance with their daily lives and greater numbers than in the past will turn to senior housing facilities to meet their needs as their children will be unable (and often unwilling) to take care of them. Moreover, the sophistication and quality of the senior housing facilities today are far superior to those of the past that were frequently thought of as poor, often used as last resort. By comparison, many of today’s properties are high end — clean, safe, and with an abundance of amenities. They are attractive properties. It is estimated that baby boomers control over 80% of personal financial assets and more than half of all consumer spending in the United States. That provides millions of baby boomers with the ability to afford the high rents commanded by premium senior housing facilities. The Case for Senior Housing Favorable demographics is, however, just one of several reasons that investors are finding the senior housing market to be an attractive proposition. One of the less publicized analyses of the senior CRE Finance World Autumn 2014 30 housing market involves the current supply situation. Despite the aging of the large baby boom generation, the supply of housing units is relatively restrained. The sector was overbuilt in the late 1990s, forcing many developers to go bankrupt or merge as vacancies climbed and demand waned. As a result, inventory growth came to a halt and never truly ramped up again. Moreover, the Great Recession of the late 2000s constrained lending, which further hobbled any development of senior housing. As such, the market today faces a potential shortage of senior housing for the eventual influx of baby boomers. Investors also view the senior housing market as a very stable source of income that is less subject to business cycles, versus other property types. Much of this is due to the fact that the decision to move into senior housing is a life decision not usually reliant on the business cycle. For instance, health reasons often spur a move into a facility with some level of assistance. Exceptions certainly exist; a major downturn that cuts into a person’s savings may cause a delay in a move to an independent living facility. In fact, this consideration may have come into play for many in the midst of the recent Great Recession, potentially restraining demand for units, as retirement savings declined and home prices plummeted. It should also be noted that the relative lack of correlation with the business cycle provides a diversification element to investing in senior housing, potentially lowering an investor’s real estate portfolio risk. Higher yields are another attractive characteristic of the senior housing market. But why does this property type offer relatively higher yields than the more prominent commercial real estate sectors? Less liquidity and coverage are two of the main reasons. Fewer players in the senior housing space than in other CRE property markets results in fewer transactions and thus a demand for higher yield. Likewise, investors also require higher yields as less market data and coverage leads to less market transparency. Current State of the Market Reis introduced its coverage of the Senior Housing sector in 2014 for 57 US markets and 184 submarkets. We separate our coverage into four primary care levels: independent living, assisted living, memory care and skilled nursing. In aggregate, the national senior housing vacancy rate is 8.7% as of the second quarter of 2014, down from 10.1% at the end of 2012. Vacancy is falling due to demand outpacing supply additions. Since 2012, occupied stock has expanded 2.4% versus inventory growth of 0.8%. Is it Time to Invest in Senior Housing?


CREFW-Fall2014 10.15.14
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