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June 30, 2017

Picture a seniors housing community. Chances are your mental image doesn’t include a stylish new building with bars boasting skyline views and structured parking with valet service in an urban in-fill location.

But as developers and investors brace for a coming wave of Baby Boomer retirees – nearly 10,000 of them turn 65 each day – a new seniors housing reality has emerged.

“Historically, seniors housing developers looked to the suburbs because land was easier to come by and approvals and funding were easier to obtain,” said JLL Managing Director Charles Bissell. “But now there is a risk of over-building in many suburban markets, and urban in-fill locations have the draw of a higher barrier to entry and much less competition.”

According to JLL’s Seniors Housing Market Report, overbuilding has led average occupancy to drop below 90 percent. But that doesn’t tell the whole story.

A cycle of its own

While not counter-cyclical, the seniors housing market does not necessarily run parallel to the rest of commercial real estate.

“We’re definitely still in an expansion phase,” explains Jessica Wolters, JLL’s Head of Seniors Housing in the United States. “Seniors housing performed better than commercial real estate at large during the recession, so capital was drawn to it early on. The demographic trends are favorable, and investors are keen to get ahead of the coming demand.”

And those investors are well-capitalized. Institutional and foreign investors have taken note of the sector’s success over the last decade.

“These investors are willing to fund larger projects like urban in-fill that simply wouldn’t have gotten done five or 10 years ago. Developers are showing this product type can work, and there is demand for it,” added Bissell.

And over the long term, developers are likely to benefit from strong investor appetite for urban projects he says, “Urban projects will appeal to institutional investors, and will generally sell for lower capitalization rates and higher prices per unit than suburban projects.”

Families driving demand

One of the reasons the urban in-full product works is because of the broad appeal these facilities offer.

“The urban density and forward-looking design of this new product means the operators can adapt and provide service to a wide array of people,” said Wolters. That service also extends to the families, who are often the ones making the decision about where their parents will live.

“Grown children are increasingly moving to urban locations, and they want to be able to walk to see mom and dad,” said Bissell. “And looking ahead to the Baby Boomers, it is anticipated that many will want to remain in walkable urban environments.”

Many of the projects are also offering the ability to “age in place” by offering multiple services under one roof such as independent living, assisted living and memory care.

The Village of River Oaks, an eight-story seniors housing facility being developed by a partnership between Bridgewood Property Company and Harrison Street Real Estate, is just that. The 1.8-acre site just outside of downtown Houston will feature a continuum of care and state-of-the-art amenities, all within a walkable urban neighborhood.

Are there any concerns?
While seniors housing remains one of the best asset classes in commercial real estate, the current expansion phase doesn’t come without some risk. For instance, Bissell notes, there is a distinct lack of care givers in the pipeline.

“As the senior population explodes over the next 30 years, the number of working age persons is growing at much slower pace. This will lead to a shortage of workers to support the growing supply of seniors housing,” he said. “It’s something investors are more aware of as this space becomes more mainstream.”

Additionally, says Wolters, there is a looming affordability question. “All the product we are seeing come online now is for demand that is projected in the future, and it’s all higher end,” she said. “But not everyone is going to be able to afford that US$5,000 monthly rate.”

Still, the outlook is overwhelmingly positive.

“The capital is there, whether for acquisitions or construction, and there is no sign that there is any slowing,” he said. “It’s a great space to be in as investors start to learn more about it.”

Charles Bissell
Managing Director, JLL Valuation & Advisory Services

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