The New Thing of Senior Housing?
Yes, there are approximately 55 million senior citizens (aged 65 and older) living in the United States, which is expected to increase to over 85 million by 2050. Yes, about 5 percent to 10 percent of adults age 65 or older have it. Need daily medical help or are getting government financial aid, but what about the rest? Over the past two years, much of the dialogue (including those of us at the CCG) related to the shortage of senior housing has focused on two segments of the population—the less healthy and the less affluent. But you know what? According to a study published in JAMA Internal Medicine, nearly half of seniors age 65 and older rated their health as “excellent” or “very good”; Yet this entire population no longer wants to own a home. So, where do they live? If you know a thing or two about private-pay senior housing, you’re probably familiar with housing options such as independent living, assisted living, skilled nursing, and memory care. These forms of senior housing have attracted the attention of capital and residents for at least the past several decades. But the senior housing market has something exciting to offer — it’s called active adult living (AAL).
What is Active Adult Living and how does it fit in?
AAL sits in the gray area between traditional multifamily housing and independent living. It doesn’t really compete with any product as the alternative to AAL is for senior citizens who prefer to stay in their homes. The AAL apartment renter is resistant to traditional senior living and has no interest in “living with a bunch of old people.” They are active, healthy and do not require a meal plan. They want to enjoy their active years in an environment that is highly facilitated, supports their interests and provides a community environment that is conducive to forming and maintaining new friendships. They no longer just want to deal with maintenance and home care – they have things to do, places to go…
Active adult life is growing in popularity and has generated a lot of investor buzz. In CBRE’s 2021 Senior Housing Investor Survey, 31 percent of respondents voted AAL as the biggest opportunity for senior housing for investment interest, receiving the highest percentage of votes. Interestingly, it is a term that is still without consensus as to a universal definition. In the absence of consensus, we would call this a niche senior housing product that is still working its kinks. What we do know is that, at their core, AAL communities are highly convenient rental apartment communities for healthy seniors — typically at least 55 years old.
Beyond our simple definition, we can also abstract away what it entails by looking at the driving demands. The growing demand for AAL communities is driven by similar motivations that have fueled the demand for millennial apartments over the past decade – the desire to live in a walkable, convenience-rich, transit-oriented space that is close to retail, dining and entertainment. Is. Not surprisingly, these communities have all kinds of amenities, running the gamut from 24-hour on-site staff, recreational facilities and social activity programming by professional staff, ground maintenance, transportation services, and home maintenance (but no housekeeping). In addition to being a place for people of similar ages to live, an important and distinguishing feature of these communities is the programming and scheduled activities, which include book clubs, exercise classes, group walks, and yoga classes. It’s called ‘active’ adult life for a reason—because programming plans are determined with that purpose in mind. Quiet social gathering places are important too, movie theaters and interestingly, gym access ranks high too. Keep an eye on the on-site beauty and barbershop; And also the dining/bistro lounge. Throw in a greenhouse or two and you get the picture.
AAL Investor Economics
Finding the right package of amenities, apartment finishing, staffing and location with matching demographics presents many challenges. Defining parameters is not an easy task. Even if an investor gets that right, the next challenge is how to brand it, price it, and iron out key metrics to measure performance. Senior citizens control the vast majority of assets in the United States, but are usually wary of their spending and uncomfortable paying for add-ons they don’t really need. Then there is the issue that seniors (who do not particularly enjoy being called seniors), like other age groups, are not homogeneous. The interests of a 55 year old senior are very different from that of a 75 year old senior, etc. How do you solve for both? Seniors want a vibrant environment that can adapt to their changing needs and requirements. One way to address this is to offer a menu of features and price accordingly. But what about the starting point for basic rent – should it be a premium or a discount for multifamily apartments and/or independent living apartments (or something else entirely)? In the industry feedback we’ve gathered, AAL apartment rents are largely trending anywhere between 10 percent-30 percent relative to traditional multifamily rents, and rents for typical independent living communities are at a significant premium. Is. We did some checking on a few websites, and we found that AAL apartments were going for anywhere between $1,200 to $4,750 per month, depending on the location and package of amenities. basic vs grand; Any “senior” is something to be traced.
What about asset-level P&L? If approaching AAL from a multi-family investor perspective, lease pro forma looks very different. AAL communities take much longer to lease, but an operator can charge more, and retention is higher, with the average resident living an average of six to eight years while traditional assisted living sees an average of only two years. Space, The Carlyle Group reiterates this message, saying that for its product, the average length of stay is more than twice the average of independent living and is on a profit margin that outperforms traditional senior housing. It argues that having a stable, consistent tenant base allows investors to pursue rent growth, which translates into higher, more consistent returns. The Carlyle Group works with a number of partners in this area, including Greystar on its Overture brand. According to its website, Greystar manages 56 AAL communities with over 10,700 apartments and has recently launched a middle market brand focused on a lower price point and adjusted amenities accordingly. Greystar and The Carlyle Group aren’t the only institutions focused on this new space, as we see more developers and investors moving into this growing space. In the past few weeks, for example, Avenue Development announced the launch of its new AAL company, Viva Bene, which focuses exclusively on this concept. Bain Capital Real Estate closed its $3 billion fund late last year that includes active adult living as a sub-strategy. Welltower announced a joint venture in the UK focused on the “next generation” of senior housing, with AAL a top priority. As capital starts to flow into AAL, we only see an increase in allocation and focus on this space.
From a pricing perspective, AAL cap rates are across the board (which seems to correspond to a lack of clarity of the area in general) but appear to be lower than their senior housing counterparts, but more than in the case of multi-family homes. are equal to or higher than the limit. rates. This presents investors with an interesting question – do they see AAL as the place to come with multifamily or senior housing? If the cap rate trend is to be considered as a guide, then this answer does not seem quite clear. Clarity of product type can be a motivating factor for investors in identifying a capital allocation opportunity.
So where does all this leave us?
Well, we know there’s a senior housing shortage, and we know that seniors aren’t much different from millennials in many respects. We also know that this product is moving forward and continues to grow in the attention and focus of investors. At CCG, we prioritize the importance of innovation and recognize new opportunities even before they reach their turning point. We believe that AAL is not just a way of doing old things in a new way but a new, new thing. When can we move on from what we’ve seen so far from these community offerings?
Deborah Smith is the co-founder and CEO of The Centercap Group. CenterCap Group, LLC is a boutique investment bank that provides strategic advisory, capital raising and consultancy services to private and public sector companies and fund managers in the real estate industry.