By Taylor Williams
While the product’s definition and brand identity can be obscure and subjective and the amount of data available on it is limited, the asset class known as active adult is experiencing healthy growth in development and resident demand. In turn, those positive vital signs are making both institutional and private investors increasingly comfortable with the property type.
This is particularly the case among investors with significant allocations of capital in the multifamily sector and that are seeking yield within that highly competitive space.
The amount of available data on the asset class is minimal — at least according to lenders that dabble in the space and researchers that track it. But there is enough statistical information on occupancy and lease-up rates to appeal to institutional players, industry professionals say.
For starters, the property has some major demographic tailwinds. According to a February 2021 report from CBRE, by 2030, the 65-plus age cohort will comprise 21 percent of the total U.S. population, a 50 percent increase from the 2020 proportion.
The report also found that the average occupancy rate of 95 percent across the active adult sector is higher than other subtypes of seniors housing. In addition, active adult communities tend to have lower staffing requirements and, by extension, lower labor costs.
Lastly, the report noted that the average stay of an active adult resident at such a community is five to seven years, and that active adult communities have an average annual turnover rate of about 20 percent versus 50 percent for traditional multifamily product. All of these attributes have contributed to the property type’s increased attractiveness to investors.
“Once residents move in, they create valued connections with other residents and rarely leave for any other reason than needing assisted living or dementia care services. A nearby, newly built competing property is unlikely to steal any residents, unlike with multifamily tenants, who often move to take advantage of new leasing incentives,” the report stated.
A panel of developers and operators addressed the definitional nature and investment appeal of the emergent property type to kick off the inaugural InterFace Active Adult conference on Wednesday, Aug. 4. Held at the Westin Galleria hotel in Dallas on Wednesday, Aug. 4, the event was hosted by Seniors Housing Business and InterFace Conference Group, both of which are divisions of Atlanta-based France Media.
More than 300 industry professionals in attendance listened to the panelists offer their insights on how communities can best convey the active adult lifestyle and concept and to understand what factors are drawing more investors to the space.
Hallmarks of Active Adult Product
Considered a subcategory of seniors housing, active adult properties are typically defined by age restrictions for renters as well as the inclusion of amenities that promote a vibrant lifestyle. Units at active adult communities tend to feature high-end interior finishes and modern kitchens and bathrooms, in keeping with the single-family settings from which many renters are coming.
It’s through these interior features and amenity packages that developers and owners of active adult communities seek to differentiate their product from well-established categories of seniors housing such as independent living, assisted living and memory care.
The panel began by discussing the difficulties of distinguishing active adult from other classes of commercial real estate, within both the traditional multifamily and seniors housing sectors. The panelists all agreed that establishing a firm and consistent brand identity for the term “active adult” can be a tricky endeavor.
“The challenge for us has been with signage and drawing people in,” said panelist Michael Uccellini, president and CEO of the United Group of Cos., a New York-based developer. “Do you put ‘age-restricted apartments’ or ‘choice-based senior housing’ or ‘active adult?’ There hasn’t really been one good nomenclature. But you need to have qualified prospects coming in, so it’s a challenge for the industry.”
“It’s definitely an area of ambiguity, and one that the industry is trying, understandably, to put a label on so we can have conversations about it,” added panelist Bob May, managing partner at Avenida Partners, a California-based owner-operator of seniors housing properties. “But the general public is much less concerned; they just want to know that it fits what they’re looking for.”
While a universal definition of the property type is still evolving, the fact that active adult properties are seeing strong rental collections and rate growth has the capital markets warming to the asset class.
Moderator Ryan Maconachy, vice chairman of health and alternative assets at commercial real estate brokerage firm Newmark, was the first to point out the elevated acceptability of active adult properties in the capital markets. As with most things investment-focused, the appeal often comes down to simple numbers.
According to the February CBRE report, the average cap rate for Class A active adult properties in core locations of the United States at that time was 5.2 percent. That figure puts the asset class roughly midway between the average cap rates of independent living (5.6 percent) and traditional multifamily (4.64 percent).
“We’ve seen a huge compression in cap rates, and that’s something that’s changed materially over the last 24 months and made this product type institutionally accepted as a ‘down the middle of the fairway’ asset class for investors in the private equity and REIT space,” he said.
“From an investment standpoint, the sector has been de-risked, and buyers are increasingly becoming believers in the product type,” concurred Uccellini.
Several panelists spoke to the rent premiums that active adult communities can command relative to traditional multifamily assets or more comparable types of seniors housing — such as independent living — as a key driver of heightened investor demand. Uccellini said that his firm typically underwrites rents at their active adult properties at a premium of 30 to 40 percent above the average Class A multifamily rent in that market.
May reiterated the earlier point that many active adult renters are coming directly from detached, single-family homes and expect a similar quality of housing. That expectation, he noted, makes these renters more amenable to paying higher rates when they transition from single-family to active adult.
“With our residents, it’s not about just getting in the right location — they’re looking at the move more seriously, almost as if it was a purchase decision,” said May. “It’s a serious decision to rent by choice. We’ve had communities with rents that were 50 percent above those of Class A multifamily communities, and that’s because our residents aren’t looking at Class A multifamily as an alternative.”
May added that in his experience, active adult communities can also achieve rent premiums over those of independent living properties because they feel much differently than independent living communities, which he said can often have the feel of assisted living facilities. That logic explains why active adult developers are so keen to provide amenity packages that connote a sense of vibrancy and energy. Those amenities represent a key means of differentiating active adult properties from traditional seniors housing communities.
Panelist Chris Guay, founder and CEO of Tennessee-based development firm Vitality Living, cited one of his company’s projects that is nearing completion in the New Orleans area that is a hotel conversion project and is seeing healthy rents relative to another hot property type: single-family rentals.
“Because that project is in a destination market and has a real appeal in terms of its lifestyle, our rents are probably 50 percent above multifamily,” he said. “For renters, it’s all about the community and being around people like them, and they’re willing to pay a premium for that. If the lifestyle and amenities line up correctly, you can charge those premiums.”
In varying degrees, the panelists agreed that the mere mention of age restrictions imbues these properties with a sense of exclusivity and can help their owners fetch higher rental rates. In particular, the panel debated the efficacy of smart branding for properties that lack the feel and features of true active adult communities.
“If you’re doing regular multifamily but just calling it ‘age-restricted’ or ’55-plus,’ and think you can charge a 40 to 50 percent premium just because you call it something different, that’s foolish,” said Guay. “This is a want-based product that’s targeted to people who have lived in single-family homes for decades. You’re trying to convince them to come down from that and rent instead of own, so you have to create a value-add proposition for them.”
But there was unanimous consent that active adult renters are drawn to properties in which their fellow renters fit the same demographic profile. Communities that achieve that type of cohesion throughout a renter base are especially attractive to investors because they are likely to see higher rates of lease renewals as residents become emotionally attached to those settings.
Panelist Michael Hartman, principal of the active adult division at Washington, D.C.-based Capitol Seniors Housing, contended that age restriction alone should be enough to achieve rent premiums. Hartman, who added that the question of what motivates renters to pay more is a major sticking point with investors, used an analogy to make this point.
“I have college-age kids. They come home after freshman year and say they want to live in the university commons, which might be $950 per month for the bed,” he said. “With two roommates, that’s about $3,000 per month. There’s a three-bedroom unit across the street for $1,500 — a 100 percent premium — but nobody considers that option because they want to be around other students. It’s the same for people who are turning age 55 or 65 — they just want to be around people like them, and that’s worth something.”
Hartman also stated that prospective renters are heavily influenced by their perception of the community’s vibrancy and chemistry among renters when they tour the property. “That energy makes the sale,” he said.
Later in the discussion, Guay questioned just how long the exclusivity factor that comes with effective branding could sustain rent premiums — and by extension, investment demand.
“I don’t disagree that age-restriction labeling will get you some sort of premium, but how long will it last?” he postulated. “Baby boomers have champagne tastes and a beer budget. Sometimes a traditional multifamily property can give them that for cheaper, so they’ll take that option. Plus, that generation sees their age differently; they feel young and want to stay that way, and that may compress our ability to get rates just by saying our projects are 55-plus.”
No matter how the property type’s branding and marketing initiatives play out, active adult has plenty of momentum, the panel agreed. While those initiatives will unquestionably differ significantly from project to project and market to market, so long as they capture the essence of what it means to be an active adult they will triumph over other subtypes of seniors housing, the panel agreed.
“Active adult is not only an innovative property type, but also a disruptive one,” said Hartman. “It could blow up independent living, assisted living and memory care the way Uber did to the taxi industry, because residents can get those savings as well as food, housekeeping and care within active adult communities.”
“Active adult is going to gobble up market share from independent living and assisted living, just like those property types gobbled up market share from skilled nursing,” said May. “Just like the iPhone did to Blackberrys.”