A $275 billion investment gap in senior living development across the country by 2030 means there won’t be enough housing to meet the demand of older adults in the next five years, according to new data from NIC MAP Vision.
The organization’s Senior Housing Outlook report, released Wednesday, says that a shortage of senior living development exists against the backdrop of “unprecedented” demand growth, emphasizing the need for immediate action as well as opportunities for investors. NIC MAP Vision CEO Arick Morton told McKnight’s Senior Living that it’s one thing to be aware of a pending megatrend, and it’s quite another to understand the nuances and shape of it, which is why the firm produced the report.
550,000-unit shortfall by 2030
According to NIC MAP Vision data, the current senior living development pace shows a 550,000-unit shortfall by 2030, a $275 billion investment shortage that will grow to $1 trillion by 2040.
Shifting demographics present the senior living industry with a challenge of historic proportions, NIC MAP Vision said: develop housing units at almost twice the maximum historical development pace each year for the next two decades. That challenge is compounded by the record low pace of construction starts, which NIC MAP Vision said sits at approximately one fourth of the pace needed.
The report underscores the need for a historic increase in new senior living units to keep pace with growing demand. According to NIC MAP Vision, new senior living starts have plummeted to just 0.2% of existing inventory, the lowest level in recent history.
To meet the projected need over the next six years, NIC MAP Vision projects, development must accelerate to more than three-and-a-half times the current pace. With only 26,000 senior living units being developed annually — compared with the highest rate of 56,000 units in the 21st century — the industry is on track to fall 50% short of the required inventory by 2025. The report sounds the alarm that only 25% of those necessary units have been developed to date.
“We are critically behind in taking care of our aging population,” Morton said, adding that he already is seeing the early stages of the demand growth. “We simply don’t have enough senior housing inventory in the pipeline, so we must act now to develop senior housing to help meet this demand.”
Even if the development machinery was operating at full speed today, Morton said, there would be some degree of shortages over the next few years. Realistically, he added, the headwinds to new development in place will limit the industry’s ability in the immediate term to scale up to this level of catch-up.
“We are absolutely already falling behind. We need to triple the senior housing development pace almost immediately. That’s not happening,” Morton said. “The data shows we’re actually moving in the opposite direction. Over time, we will catch up, but we’ll be chasing it for a little while.”
Despite historic absorption and occupancy growth and “exploding” demand, higher interest rates and limited capital availability are driving senior living construction starts to near all-time lows not seen since the Great Recession in 2008, Morton said. The current level of construction starts means that supply growth will remain depressed for years to come, resulting in significant supply-demand imbalances that will continue into the foreseeable future.
‘Significant generational opportunity for investors’
The situation presents unique and unprecedented investment opportunities, positioning senior living to be one of the most profitable real estate asset classes, Morton said.
“There’s a significant generational opportunity for investors in senior housing development and acquisition,” Morton said in a statement. “As the demand for senior housing grows, investing in this sector will result in substantial returns and long-term growth.”
Senior living market fundamentals are shifting as the sector continues its pandemic recovery.
Morton also argued that the penetration rate has recovered from its COVID decline. The data, he said, suggest that the historic absorption seen in 2023 and in the first quarter of 2024 is driven by surging growth in the 80-plus population and not merely a continuation of pandemic recovery.
“Historic” absorption growth — already up 40% year over year — and rapid occupancy recovery indicate a significant unmet demand as the population of people aged 80 or more years is projected to grow rapidly over the next 25 years, according to the report. Despite this, the current investment trend is not enough to meet the growing need.
“The senior housing industry has battled through a trifecta of crises. As we move past the challenges of the pandemic, labor shortages and high interest rates affecting capital markets, the senior housing market presents a prime investment opportunity,” Morton said. “We see the longer view. The demand is high and the current supply insufficient, making it an ideal time for investment in this sector.”
Recent filings by the industry’s major real estate investment trusts showed moderating expense growth and margin expansion, as the combination of growing occupancy and favorable rent/expense growth trends drive margins upward, according to the report.
Expanding margins, the report states, are the “clearest sign” of strong fundamentals in the senior living industry. Although soaring wage growth led to increased operating expenses and declining margins in 2021 and 2022, the trend reversed in 2023, with margins expanding and expenses declining across the board, NIC MAP Vision said. That margin expansion is likely to continue as demand growth outstrips supply growth, the firm said.
Public market valuations of senior living-related equities now exceed pre-pandemic levels, showing investor confidence in the senior living sector, according to the report.
Morton said the near-, medium- and long-term outlook for the senior living industry is bright due to the sector’s resiliency in the face of economic and pandemic disruptions.
Private capital restrictions problematic
With private capital accounting for most investment dollars in the senior living industry, recent scrutiny on private equity and REITs could lead to policies that create major obstacles to increasing necessary development, according to the report.
“It’s impossible to imagine a scenario where we’re able to meet this incredible societal challenge that doesn’t involve more and more private capital,” Morton said, adding that no other sources of funding have been shown to be available to the sector. “The incredible need to grow the industry is going to be a very practical challenge or obstacle to any policy that seeks to restrict private capital in the industry.”
