By Susan M. Traino, CPA, CCIM
Increased Demand
Currently in the United States, the adult population that is over the age of 60 is growing at an increasingly rapid rate due to aging baby boomers, thus the outlook for the future of this industry is on the upswing. As is evidenced by the chart below (Figure 1), the older population will continue to grow significantly in the future. This growth slowed somewhat during the 1990’s because of the relatively low number of babies born in the 1930’s, as a result of the Great Depression. Conversely, the older population will burgeon between the years 2010 and 2030 when the “baby boom” generation reaches age 65.
It is estimated that the population 65 and over will increase from 35 million in 2000 to 40 million in 2010 (a 15 percent increase) and then to 55 million by 2020 (a 36 percent increase for that decade). By 2030, there will be about 71.5 million older persons, doubling 2005’s figures. People 65 and older are expected to grow to be 20 percent of the population by 2030. The 85 and older population is projected to increase from 4.2 million in 2000 to 6.1 million in 2010 (45 percent) and then to 7.3 million in 2020 (74 percent since 2000).
Minority populations are projected to increase from 5.7 million in 2000 (16.4 percent of the elderly population) to 8.1 million in 2010 (20.1 percent of the elderly) and then to 12.9 million in 2020 (23.6 percent of the elderly). Between 2004 and 2030, the Caucasian population 65 and older is projected to increase by 74 percent compared to 183 percent for other minorities including Hispanics (254 percent); African-Americans (147 percent); American Indians, Eskimos and Aleuts (143 percent); and Asians and Pacific Islanders (208 percent).
As the American population grows older, it will soon need a place to live. Historically, older parents move back in with their children and in some cases, this pattern will continue. On the other hand, the majority will choose to remain on its own, living among its peers in either an independent or assisted living development, depending on the individual needs. There appears to be a preference among the elderly to live in a community that offers both components within the same campus. Hence, if one spouse is transferred from an independent to an assisted living facility, couples may remain in the same community but simply move to another section.
Limited Supply
For savvy real estate investors, this is an opportunity to capitalize on. There are fewer assisted and independent living communities than the demand requires. Most of the existing facilities are dated and provide outmoded services that the residents do not need, i.e. nursing homes that are intended for frailer individuals. Demand is particularly high in upper- and middle-class neighborhoods located in major cities or surrounding suburbs.
There are two different ways to create an assisted living development. One method is to identify a piece of property in the proper demographic profile and build it with all the amenities that baby boomers require. The other is to convert an existing buildings, such as apartment complexes, outdated hotels or retirement buildings. Converting these buildings require an assessment of feasibility, since the interiors usually need a complete renovation to provide easier access for the physically disabled. Developers who would like to get involved in assisted-living development should have some experience in healthcare or retirement fields, or be able to hire a management team or a joint venture partner with this particular experience.
In 2007, the supply of independent living facilities increased due to increased construction activity which resulted in decreasing occupancy to 95.3 percent, down 120 basis points from the same period a year ago, according to NIC MAP data and analysis services data and assumption services, fourth quarter 2007. The supply of assisted living facilities also increased during the end of 2007, which caused occupancy to decline to 95 percent, a 70 basis point drop from prior year. It should be noted that even though supply is beginning to increase, rental rates remain strong.
Cap rates have been only increasing slightly, between 20 and 40 basis points, depending on product and location. As the population ages, the demand for assisted and independent living facilities will continue to rise. Older people do not want or need nursing homes, but may need some help at home or do not want to live alone and isolated. For these reasons, assisted and independent living communities fill a growing need and cap rates are expected to continue to be attractive and draw investors as demand increases.