The state of the senior living sector is strong, having “weathered the black swan event of COVID,” but the real need lies in addressing the gap in affordable senior housing, according to one expert.

Occupancy rates have recovered, labor costs have come down, and higher-than-average resident rate increases put forth over the past two to three years have contributed to the recovery in senior living. But almost one-third of older adult households are “cost-burdened,” paying more than 30% of their income for housing, with more than half of that group paying more than 50%, according to Mark Myers, Walker & Dunlop managing director of senior housing.

The State of the Nation’s Housing 2024 report from the Harvard Joint Center for Housing Studies also showed that within the next decade, the population of adults aged 75 or more years will increase by 45%, resulting in a growing need for affordable senior living communities across the nation.

Addressing this need will require collaboration among the private and nonprofit sectors, as well as policymakers at all levels of government, Myers said. 

Medicaid waiver success

Although Medicaid does not cover the cost of room and board in assisted living communities, it does cover supportive benefits for eligible individuals. 

A proponent of Medicaid waiver facilities, Myers pointed to the success of the Illinois supportive living program, an alternative to nursing home care for low-income older adults and people living with disabilities. Rather than requiring vouchers, supportive living facilities devote a certain percentage of their beds to low-income Medicaid recipients. Myers said that those programs can drive operating margins as high as 42%, with operators relying on private-pay residents to fill in cost gaps.

But with high construction costs, he said, the only way to make building a supportive living project work is through low income housing tax credits, or LIHTC. The issue, Myers added, is the demand for those types of programs is not strong, because investors see Medicaid participation as a risk.  

Brett Murphy, senior director of Walker & Dunlop’s HUD production team, added that developers that have accessed the LIHTC to try to make returns reasonable to general partner investors are finding that the end investors for those credits have evaporated. Banks, insurance firms and other traditional LIHTC investors, he added, are seeing so many standard affordable multifamily tax credit opportunities that they don’t need to allocate those dollars toward senior housing projects that carry operational and Medicaid risk. 

Development of affordable senior living has been “completely stifled” due to this risk aversion, as well as other challenges facing other developers — high costs, supply chain issues, labor shortages and wage pressures, Murphy said. 

Profit drives mission

Myers called on all levels of government to continue to develop programs to address the affordable housing gap while letting business people build facilities and make money.

“Profit drives mission,” he said. “If there’s a way to make a profit with something, some of the smartest business people will get involved and they will build the building properties for us.”

As long as new entrants into the market can see that risk-adjusted returns are attractive against other investments, they will make investments in the senior housing space, Myers said. 

“Someone has to understand the risks, but the additional returns are also higher,” he said, adding that the industry has proven that its unlevered returns are 100 to 150 basis points higher than those for multifamily or industrial investments. “There is a reward for the additional business risk taken. And that risk is mitigated to a great extent by the choice of a  good operator — investors have learned that over time.”

Senior living, Myers said, is an industry where one should “bet on the jockey, not the horse.”

“If you have the right jockey on the horse, the right operator at the facility, the right marketing people on site, the right executive director, the right staff members all the way down to the nursing assistants, then a property will be a success,” he said. “If you have a great physical plant and an average staff, you’ll have an average result.”

Myers said that scrutiny over private equity and real estate investment trusts in senior living is misplaced, saying that most of those companies have a long-term view of their investments. 

He called private equity firms an “intrinsic” part of the senior living industry and said that they often improve properties dramatically — operationally and through good operators, and by fixing up the physical plant. When such owners or investors do sell an asset, he said, that sale benefits the residents and the industry because the property has been improved, in most cases. 

Similarly, he said that REITs have evolved from being only landlords to being partners with operators and relying on those operators to make a project successful.

“That becomes very powerful,” he said.