Key Perspectives from Our Interview with Bloomberg

We’re in the middle of one of the largest demographic shifts in recent history. With the Baby Boomer generation aging— and with advances in medicine and technology helping people live longer— according to the U.S. Census Bureau the number of people 80 years and older will go from 13 million today to over 32 million by 2050 in what experts are calling “the silver tsunami.”

This wave of people will need support as they age, and many turn to retirement and senior living communities that manage everything from meals, housekeeping, maintenance, and social activities.

“My husband got lung cancer and passed away in a year, and then I stayed in the house for another year. And then I decided it was time for me to move on,” says Marilyn Bergstrom, an 87-year-old widow who recently left her home in Seattle, Washington for an upscale senior living development called Murano. “This is far better than any place I expected to live. When I first moved in, I just felt like I was in a fancy hotel every morning that I woke up.”

Marilyn’s experience is exactly what senior housing developers and owners hope to achieve with their properties.

Arick Morton, CEO of NIC MAP spoke with David Westin on Bloomberg Television’s “Wall Street Week” about larger trends in the senior housing industry and what that means for businesses investing in senior housing. Watch the full interview here, or keep reading for more.

Demographic Shifts Fueling Demand 

We’ve known about the Baby Boomers aging up for years—it’s a matter of simple math—but what’s been more interesting about this demographic shift is that within the growing population over 75, those with annual incomes over $100,000 are growing much faster than the rest, with the highest percentage of growth coming from those with incomes over $200,000.

It’s this shift that’s fueling demand for high-quality senior housing. This surge means demand is outpacing supply, creating a growing gap between what exists and what seniors need to meet their needs. In the meantime, the growing gap will likely materially lift senior housing occupancies as inventory lags behind demand growth.

Economic and Business Implications 

What does this look like in practice? Just ask Tana Gall, President of Merrill Gardens, which owns and operates retirement communities in 70 locations across the United States. “[We] help you live longer and certainly not just longer, but happier lives,” she says. “But I would not say it’s a high-margin business. It is a middle-margin business. We have been a little more compressed since the pandemic.” 

Inflation and rising interest rates are two downward pressures on an industry still recovering from a drop in occupancy during the pandemic. To recover and compensate for this, operators limited rent increases below expense growth, compressing margins while the industry worked to regain occupancy. 

To deliver high-quality service requires well-trained staff, including medical personnel. Though staffing is 5% above pre-pandemic levels, it remains an issue for operators. “If [you asked] me, ‘Tana, what keeps you up at night?’ I would have said getting enough great team members,” says Tana. “We are trying to attract more people into our business that don’t even know we exist.”  

Challenges in Scaling Senior Housing 

What the industry really needs right now is scale in construction—but instead, senior inventory growth has hit all-time lows right as demand is about to explode.  

This kind of mismatch has happened twice before in the industry: The first, in the mid-1990s after assisted living hit Wall Street; and the second when the 2008 recession hit. But this new economic climate is driving the opposite problem, with demand outpacing supply. This is the lowest we’ve seen construction starts in 30 years or more. According to NIC MAP data, at the current pace, we’re on track for about a $275 billion shortfall in senior housing development. 

Why? The pandemic brought inflation to construction costs as well as a historic increase in interest rates, and the effect of that has been to make the cost of development basically out of reach for most markets. Construction costs have gone up by 25-30%, and there’s more debt risk. Putting those two together drives up the cost of development, and because margins remain compressed from the pandemic recovery (see above), the projects just don’t pencil. And with multi-year development timelines, this challenge will only grow over time. 

Says Tana, “I’ve got two pieces of land today that are entitled and ready to go, but I can’t financially make them work yet. Right now, the cost of capital is just too much. It’s a scary scenario, that there’s markets across the country with no excess capacity. The impact that could have on our entire society is pretty significant.” 

The Opportunity for Investing in Senior Housing

Robust demand that’s about to explode. Seniors with the ability to pay high prices. A business with solid margins.  

All of it should make the world of senior housing a truly good real estate investment.  For investors to take advantage of the exploding demand, there have to be enough projects in development now, just waiting for the capital and go-ahead. Investors should look at this not only as an opportunity to generate an incredible return, but to help the industry meet the needs of our society. 

Says Marilyn, “Everything right now is absolutely perfect. My kids and grandkids come for dinner and spend time here. It’s a place that people like to come to. That’s a really good feeling.” 

For more on the long-term implications of the silver tsunami for the market and the opportunities it presents for investing in senior housing and creating sustainable, enriching environments for seniors, watch the full Bloomberg interview