WHY INVEST IN SENIOR HOUSING?
1. High Cash-on-Cash
2. Demand Drivers
The demand for senior housing is not only secular, that is driven by demographics, but it is also (with the exception of active adult communities) need-influenced or need-driven, that is, not discretionary and required by the chronic care issues of aging. It is hard to make the same objective case for growing demand for office, retail and industrial properties.
Demand for senior housing is also much less impacted by "technology risk". This very real risk will impact retail, commercial, and industrial property types to a much greater extent over the foreseeable future, and cause the investment analysis to be much less certain with regard to understanding and measuring demand.
3. The Business
Cycle is Independent
While demand is moderately impacted by severe inflation and an inability to sell residential real estate, social security payments received by seniors and the need-driven element of the product are two substantial cushions to the traditional economic dislocations that affect yearly demand for other property types. The business cycle for senior housing is almost exclusively dependent upon the supply and demand of capital and for the various product types. For the seniors' apartment, independent, CCRC, and dementia units, demand exceeds supply in most markets nationwide.
Even in markets that have reached temporary saturation for assisted living, many of the national operators have maintained 88% occupancy rates or better. There is considerable evidence that the more sophisticated companies with newer properties are taking market share from the smaller, older properties. There is a strong argument that adding independent living properties to a multi-family portfolio will decrease risk for a given level of return or increases return for a given level of risk, since these assets are not highly correlated.
Cost Structure Creates
In this specific example, NOI can increase by $500,000 per year on an additional equity investment of $2,500,000 above the equity investment in the property, producing a doubling in the value of the additional equity investment at an 11% capitalization rate.
5. The Current
Market is Inefficient which Provides Opportunities To Make
Above-Market Returns Through Sophisticated Research