Smart investors have a big opportunity to capitalize on an unmet need.
By Daryl Carter
The seniors housing market continues to attract strong investor interest, and for good reason. According to the National Multifamily Housing Council (NMHC), the number of seniors over the age of 75 will increase by 3.2 percent each year, from 19 million to 26 million by 2025. The number of individuals living in seniors housing is projected to increase from 1.7 million to 2.2 million by 2025.
Based on these demographics of our aging population, demand for seniors housing remains strong, with national occupancy rates at approximately 90 percent, according to the National Investment Center for Seniors Housing & Care (NIC).
As the need for seniors housing continues to climb, so too are rents. NIC reports that rent growth in this sector currently averages 3.2 percent annually — a considerable amount for a demographic with a fixed or limited income.
While many seniors are approaching retirement with improved confidence, the majority of them are still working well into their 60s and 70s, mainly because they cannot afford to retire. More than half (54 percent) of seniors age 60 and older intend to work either full- or part-time.
Many of those who are retired and living on Social Security benefits face serious affordability challenges and are forced to spend more than half of their income on rent.
There is clearly an overwhelming need for affordable seniors housing in today’s market. Yet beyond the need to meet this demand, there is an even greater need to provide affordable spaces that ensure a high quality of life for residents in this demographic.
This insight raises an important question: How can seniors housing owners and developers address the affordability challenges in this market sector, improve quality of life for residents and simultaneously generate strong returns on behalf of investors?
As an affordable housing investor that owns seniors housing communities across the nation, we have identified several key strategies for capitalizing on the demand for affordable seniors housing, while also delivering quality spaces to support residents and their desired lifestyles.
Strategy #1: Don’t over-improve
Across the seniors housing industry — and multifamily in general — a capital improvements arms race is underway as investors reposition communities, introducing a host of luxury amenities and concierge-style services to drive rent growth.
While many seniors housing investors are focused on catering to the top-tier renter, there is an undeniable need for affordable living spaces for the majority of seniors.
A report by Make Room, a nonprofit organization representing renters, shows 43 percent of seniors who pay more than half of their incomes on rent rely solely on their Social Security benefits. Simply put, many seniors cannot afford the fluff of over-amenitized apartment communities.
Rather than investing in over-the-top amenities, focus on renovations that require minimal capital investment. In doing so, owners are able to ensure high-quality housing without the significant rent increases associated with such improvements.
By investing in “smart” renovations that meet the needs of senior renters, owners can attract and retain long-term residents, resulting in high occupancy levels and strong risk-adjusted returns on behalf of investors.
Strategy #2: Salvage and reinvest in existing product
The United States loses approximately 100,000 apartment units per year due to obsolescence, mostly in Class C properties in need of renovation. As rising construction costs make it increasingly difficult for developers to build new affordable seniors housing, many are redeveloping older projects to address this need while also generating attractive returns.
While the Low-Income Housing Tax Credit (LIHTC) program has helped finance the construction of new affordable units, there is simply not enough government assistance to increase the supply of affordable housing at the current rate of demand.
Given the complications of building costs and land entitlements, the redevelopment of existing affordable seniors housing is a much more viable and cost-effective alternative to building new construction. By acquiring and repositioning existing affordable housing, investors can deliver a quality, affordable product at a huge discount to new development, leveraging demand to increase occupancy rates.
Another advantage to affordable redevelopment is the quicker turnaround. Typically, building a new affordable community can take anywhere between five and seven years. Renovating an existing community will only take about 10 to 12 months.
By redeveloping an existing product, investors can generate tremendous value within a short period of time, resulting in high occupancies, long-term retention and consistent returns.
Strategy #3: Invest in community-level programs
One of the ways that investors can add value to affordable communities is by investing in support services and social programs that improve the quality of life for residents.
Many of these social services do not require hefty capital investments, yet they can significantly impact the performance of a community by driving resident retention, thereby increasing net operating income and risk-adjusted returns.
For example, at one of our affordable seniors housing properties — Heritage Park in Duarte, Calif. — we offer a community gardening program for our residents. Comprised of 15 senior residents, the gardening club meets regularly to tend to a community garden and share ideas for ongoing beautification of the property. Our property management team supplies all of the materials, including mulch, gardening tools and native plants.
These types of social services reinforce a sense of community and improve the feelings that residents associate with home, which in turn results in higher retention and occupancy. Since acquiring Heritage Park in September 2012, we have successfully increased occupancy from as low as 89 percent to consistently over 99 percent. It is a true testament to the benefits of programs that enrich the quality of life for residents.
Partnering with local nonprofits is another way that investors can deliver tremendous value to their affordable communities. At Heritage Park, we work closely with COR-CDC, a nonprofit organization that provides a host of resident services. Offerings include healthy living and wellness seminars, weekly fitness classes, and arts and crafts courses. These programs further enrich the quality of life at our community and increase the profitability of our investment.
The fact is, most seniors housing communities today are comprised of active seniors. Many have vibrant social lives and pursue a wide variety of hobbies. By providing services that enable seniors to pursue their passions and live their dreams, investors can generate deep social benefits, while also making a profit.
There’s no question that there’s an unmet opportunity in affordable seniors housing. There’s an unfilled demand for safe, high-quality, affordable housing that enables seniors to pursue their desired lifestyles well into retirement. Investors who take note of this demand stand to benefit by way of risk-adjusted yields and a measurable social impact.
Daryl Carter is founder, chairman and CEO of Avanath Capital Management, a privately held, vertically integrated investment firm with a focus on workforce and affordable housing investments throughout the United States. Carter is also immediate past chairman of the National Multifamily Housing Council.