Commercial real estate industry insights.

Active Adult Communities Riding the ‘Grey Tsunami’ Wave

by R.J. DeBee, III | Oct 24, 2022

Baby boomers, the generation that started the rebellious youth movement in the 1960s, are still shaking up American society. They represent a demographic shift known as the “grey tsunami” that is sweeping the country.

The rate of U.S. baby boomers, estimated at about 73 million, entering their senior years continues to grow significantly. An estimated 10,000 people are turning 65 daily, with the leading edge of this age group now in their mid-70s. And all of the baby boomers, those born between 1946 and 1964, will have at least reached 65 by 2030, and comprise roughly one-fifth of the U.S. population.

This population swing means that more housing must be made available for boomers who have reached or nearing retirement age. But this generation is expected to lead longer, healthier and more active lives than past generations, resulting in many choosing a home that fits their on-the-go lifestyle.

To meet this demand, active adult communities are popping up all over the country, particularly in the Sun Belt where many older people have relocated to a climate that is kinder to their aging bodies and more accommodating to an active life.

There are more than 2,000 U.S. active adult communities – defined as purpose-built multifamily housing for seniors with an emphasis on community and activities – with more under construction or in the planning stages. They are divided into two categories: age-restricted and age-targeted. The former means that it must abide by federal housing rules requiring that at least 80 percent of the community has a resident that is 55 years or older, while the latter is marketed to people 55 years or older but does not have specific legal requirements for residency.

These communities attract a relatively young senior population (early-to-mid-70s), as opposed to those in their 80s and older who typically live in more conventional senior housing options, such as assisted-living communities and nursing homes.

Active adult communities are a relatively new variation of independent living communities. Both offer amenities and community activities as well as living spaces ranging from studios to single-family homes. Like independent living, active adult communities don’t have onsite healthcare services and residents are usually responsible for their own dining, housekeeping and laundry services.

Various factors are driving demand for active adult communities. One of the biggest reasons is empty-nester baby boomers downsizing to smaller homes requiring little or no maintenance and offering plenty of amenities.
They also provide an attractive housing option for healthy baby boomers seeking an environment that offers activities supporting health, wellness and social interaction with their peers.

And during the height of the COVID-19 pandemic, active adult communities experienced consistent demand during the outbreak, while traditional senior housing didn’t fare as well.

Growing Investor Demand for Active Adult Communities

Ongoing compression in cap rates for active adult communities reflects continued strong investor interest in this asset class. In fact, active adult living has the lowest cap rate among other types of senior housing, with Class A properties at an average of 4.6 percent and Class B properties at an average of 5.7 percent, according to one industry report. There also has been a surge in demand for active adult housing from those making investment plays in both senior and multifamily housing.

A Grandview Research report said the country’s active adult housing market is valued at more than $560 billion and is projected to expand at a 4 percent compound annual growth rate over the next eight years.
Active adult communities have become appealing to owners and investors in recent years because of the length of time that residents live in these communities and a higher premium on rental rates.

For instance, baby boomers, who move into these communities in their early ‘70s, typically stay in their homes for an average of 7 to 8 years. Rents range from a base rate of 15 percent premium over market rates to as high as 50 percent premium over the market rent for some luxury retirement communities, depending on the type of services offered.

Furthermore, these properties are viewed more favorably than typical multifamily products because they typically have a lower default rate, prohibit renting to those with children, and have fewer noisy parties and other disturbances.

Rising demand for active adult communities has given investors keen insight into the development cycle of senior housing. While active living meets the needs of the initial wave of baby boomers, other senior housing segments, such as continual care (independent living, assisted living, memory care) and skilled-nursing care also need to undergo significant expansion, in order to house the millions of baby boomers reaching the age of 80-plus over the next decade.