Senior Housing

Avoiding the Luxury Bubble

By Erica Rascón on Oct 23, 2014 in News

Real estate professionals ranging from multifamily developers to REITs are launching themselves into the senior housing market, hoping to cash in on the next frontier for Baby Boomers. While most analysts agree that the industry isn’t in immediate risk of inflating another bubble, the looming threat lies in the lack of housing diversity.

Reports from the National Investment Center for the Seniors Housing & Care Industry state that occupancy is at 89.9 percent and rising, and that annual asking rent growth has increased by 2 percent. Newly constructed or remodeled market-rate housing for younger seniors will experience the greatest growth at 3.1 percent each year, predicts Green Street Advisors. Yet many of the newer facilities are out of the price point of Baby Boomers who are woefully underprepared for retirement.

Herein lays the potential bubble. The industry is at risk of flooding the market with high-end communities. An unstable affordable housing market and limited middle-income options leave the demand of many consumers unmet.

The writing is already on the wall: frequent budget cuts plague affordable housing programs. Middle-income seniors and those who do not qualify for subsidized housing face a lack of product options. A report from Hart Research Associates suggests that 64 percent of seniors (64%) believe it will be challenging to find quality housing that meets their physical needs as they age. 61 percent of seniors find it challenging to secure housing that is affordable.

Diversifying the new construction and renovation efforts would solve two dilemmas at once, avoiding a senior housing bubble and meeting the demand of a notable demographic of consumers.

“There is a bigger opportunity in the senior living industry and a need for a middle-price point product,” says James Gray, president and founder of Bridgewood Property Group. Such projects can be as lucrative as their pricier counterparts if the right compromises are made: Building in the suburbs is one way to cut development costs. Scaling down quantity rather than quality is another. Gray suggests offering two or three entrée options in the dining program at each meal rather than four or five, for example.

Yardi client Presbyterian Senior Living (PSL) has found success and stability by building a diverse portfolio that emphasizes quality over quantity. The organization offers 1,082 units of mixed-income Continuing Care Retirement Communities, 341 market rate rentals and 983 affordable units.

Consumers are responding favorably to the opportunities that PSL presents. Heritage Run, a mixed-income community in the suburbs of Baltimore, reached 50 percent occupancy within the first two weeks of opening.

“Our strategy over the last few years has been to be able to have independent living for seniors that covers the entire economic waterfront, from those with very little to those who are well-endowed financially,” says SEO Stephen Proctor. It is a strategy that has served PSL well but isn’t being replicated enough to meet the nation’s growing need.

The lack of low and moderate income housing isn’t a senior problem. It’s a problem affecting more than half of Americans under the age of 65. Nearly 60% of Americans feel that it is challenging for retired people or senior citizens to find affordable housing in their own communities, reports Hart Research Associates. Families want to be near the independent seniors in their lives and especially within access of those requiring assistance. Companies that listen to American’s growing concerns can help avoid overbuilding luxury housing while gaining the support of millions of potential renters.