Commercial real estate industry insights.

Optimistic Outlook Seen for Seniors Housing Market in 2024   

by bbgres_admin | Mar 25, 2024

BBG’s second annual seniors housing investor survey revealed a largely upbeat forecast this year about investment opportunities in this attractive asset class.

Survey respondents’ sentiment is based on various market trends and macroeconomic factors expected to favorably impact this real estate sector. Their bullish mood is attributed to a combination of factors. That includes expectations of compressed capitalization rates, higher rental rate growth and transaction volume, a reduction in interest rates, and a longer-term trend of more seniors housing needed to accommodate the country’s aging population.

Completed in January, the survey’s findings are based on responses from major investors, lenders, developers, brokers and other key players. The survey analyzed seniors housing in the top 50 and remaining U.S. markets for active adult, assisted living, memory care, skilled nursing care, and Continuing Care Retirement Community/Life Planning Community (CCRC/LPC).

Cap Rates to Help Bolster Investment Opportunities

The sector’s optimistic outlook is partly based on projections of improvement in capitalization rates — a reversal from BBG’s 2023 survey which showed the market was anticipating and underwriting an expansion in cap rates. This year’s survey said the difference between Class A primary and secondary markets exhibited nearly a 75 basis points (bps) increase in care levels.

Active adult capitalization rates posted the lowest of all care levels, followed by Independent living cap rates. Skilled nursing and CCRC/LPC had the highest cap rates due to their increased acuity.

Higher Rental Rate Growth Projected

According to the survey, rental rates are expected to be significantly higher for all care levels this year, consistent with the trends in the post-pandemic environment.

More than 90 percent of the survey respondents expect higher senior housing rental rates excluding care. For assisted living and memory care, the most frequent growth projection was between 5 percent and 10 percent, with more than half of the respondents (52 percent) anticipating increases surpassing 5 percent.

Additionally, more than 80 percent of the respondents expect higher transaction volume in 2024 compared to the previous year.

Anticipated Lower interest-Rate Cuts To Spur Sector Demand

As a result of easing inflationary pressures, respondents expect the Fed to reduce interest rates sometime this year. Rising interest rates in recent years have limited investment in senior housing and other CRE sectors due to higher borrowing costs.

Over 80 percent of respondents polled in the survey expect lower interest rates this year. Additionally, more than 75 percent of the respondents anticipate interest rates and the overall availability of debt to have the greatest impact on deal volume in 2024.

Active Adult Communities to Lead Stabilized Occupancy Rates

In 2024, the active adult sector is projected to have the highest stabilized occupancy, while skilled nursing is expected to have the lowest occupancy, according to the survey.

Also, CCRC/LPC reported the largest spread in stabilized occupancy compared to other care levels. This is expected because of a wide discrepancy in acuity mixes and buy-in structures inherent in these communities.

Swelling Ranks of Aging Baby Boomers Spur Seniors Housing Needs

Demand for this asset class will continue to strengthen as older Americans seek different levels of seniors housing.  According to census figures, the number of Americans ages 65 and older is projected to expand from 58 million in 2022 to 82 million by 2050, a 47 percent increase. This age group’s percentage of the total U.S. population is expected to grow from 17 percent to 23 percent during this period.

Baby Boomers, those born between 1946 and 1964, represent the largest share of this demographic. The last of this age group will turn 65 by 2030.

The need for seniors housing is also underpinned by Americans living longer. According to Centers for Disease Control and Prevention estimates, the average American’s life-  expectancy was 77.5 years in 2022, a 1.1 year increase in 2021.  

Higher Operating Costs Facing Seniors Housing

Market participants, however, are expected to face challenges this year. The survey showed more respondents expecting higher operating markets and squeezed margins. The majority of survey respondents, a cumulative 81.7 percent, expect operating expenses to rise by 3 percent to 5 percent compared to 77.5 percent in the 2023 survey.

Higher costs were attributed to staffing expenses, inflationary pressures on supplies, and notably increasing property insurance costs in primary seniors housing states.   

View the Report