The severity of the senior living housing shortage is no secret. A June report from NIC Map Vision projects a 550,000-unit shortfall by 2030 as historically low construction in recent years collides with projected massive demand growth. According to the report, construction starts for senior living development have fallen to a mere 0.2% of existing inventory, the lowest level since the Great Recession of 2008. NIC MAP Vision says construction starts are at about a quarter of the pace that is needed to meet the growing demand.
The future of senior living appears certain to be marked by major supply shortages. NIC MAP Vision estimates that development will need to accelerate dramatically to more than three-and-a-half times its current pace to meet the expected demand.
Kai Hsiao, CEO for Healthcare at Keppel Capital, said the construction climate in recent years has simply been a very difficult one, starting with challenges with capital lending.
“The lending environment is tougher now. Ever since the interest rates went up in Q4 2022, finding debt is just harder now, whether it be for development or whether it be for acquisitions,” Hsiao said. “It’s not really a reflection of seniors development. It really is just the debt market environment in general.”
The major lenders are not in a good position to support projects, he said.
“If you take a step back and take a look at the industry, there’s about $20 billion in short-term maturities that are due this year and next year and a little bit into ‘26,” Hsiao said. “So, all the banks, all the lenders know that there’s all this debt that’s coming up, and they need to have capacity to deal with that and get it off their books. Because of that, they’re not really looking to increase their exposure into senior living until they address that. This is just a tougher lending environment – whether it’s for development or for acquisitions – because of everything that happened when the interest rates went up.”
Hsiao said it is important to recognize that the difficult lending environment is not limited to senior living.
“Take a look across all the real estate classes, and I think you’ll find that interest rates affected everybody,” Hsiao said. “You’re having the same type of slowdown of development, whether it be multifamily or hospitality or retail, everywhere. Everyone Is dealing with that global phenomena right now.”
Fortunately, inflation and the interest rate climate have improved this year, and the Federal Reserve appears to be on the verge of lowering the rate in September.
“Some people may go in and start a project now with higher rates than what they want with the expectation that they get flipped out to lower-cost debt somewhere down the road here because it looks like the environment is getting better,” Hsiao said.
However, investors eyeing senior living as a promising sector won’t just be considering new construction, Hsiao said.
“The question you always have to ask yourself as an investor is, is it a better time now to buy or a better time to build?” Hsiao said. “And because of the stress in the industry caused by the short-term maturities, people believe that there will be more distress opportunities on the buy side – more immediate opportunities. So investors may decide, ‘We’ll buy versus build,’ because opportunities to buy will be more distressed and therefore will bring better returns. If I’ve got $100 million, do I spend it on a development project that’s going to take me four or five years in order to realize it? Or do I go out and buy a distressed asset that I could realize sooner as an investor? Those are the questions you’re always asking yourself.”
Still, will the shortage in senior living supply prove attractive enough to investors to make them more open to investing in building?
“Investors certainly appreciate the fact that there’s going to be huge demand for senior living, hence the big surge of development back in the 2016-2017 time period – people saw that coming over the horizon,” Hsiao said. “There’s a housing shortage in general right now, and one of the challenges of why homes cost so much is that there’s more demand than supply. So the question again for investors is are you going to lean more toward building more single-family homes or senior living or something else? You could argue that as an investor I see that there’s a demand for housing everywhere. The thing about senior living is that it’s a specialty, so your general investor is not going to be thoroughly versed in senior living and is likely going to go more toward general housing versus something as specific as senior living.”
Plus, he pointed out, the lease-up periods are longer in senior living.
“If you’re multifamily, their lease-up periods are going to be in a year, something like that, whereas senior living may take three, four years to lease how many units you bring to market,” Hsiao said.
Further competition for investments in new construction could come from active adult communities, Hsiao said.
“Active adult has been emerging,” he said. “While NIC may not technically define it as senior living, consumers do, and that is an option for them. I think one of the questions in the immediate future is how is active adult going to impact senior living?’”
Hsiao notes that active adult communities typically have fewer restrictions in the building process and the makeup of the residents “so you can build it faster and cheaper,” making it more appealing to some investors.
Hsiao noted that with the largest banks “hitting their ceiling” for seniors exposure, some have turned to others, such as regional banks and debt funds, to lend funds for capital projects – and that may continue in the years ahead. “It makes people take a look at some other options,” he said.
Hsiao wonders whether the major supply shortage on the horizon will lead to the federal government getting involved with special types of HUD loans or Fannie Mae offering special programs that aim to boost senior living construction.
“If they do something like that, it would be targeted more toward middle-income senior living as opposed to the high end because they will assume that those types of investors can find higher capital debt elsewhere because they can charge higher rates,” Hsiao said. “States and municipalities could look at those types of opportunities, too. Whether anything comes to fruition, though, is still very much to be determined.”
Because of the combination of high demand and low new construction, Hsiao said investors and others seem poised to consider a range of fresh approaches to boosting supply. For instance, one out-of-the-box possibility is that some office buildings – which are seeing lower demand after the pandemic as more workers work remotely – could be converted into senior living facilities, thereby taking one category seeing reduced demand and transitioning it into a category struggling with supply, Hsiao said.
“It’s an interesting possibility that is now out there,” he said.
Similarly, Hsiao wonders if the supply-demand ratio continues to grow more challenging and there isn’t much new product out there, some older facilities considered too old or even obsolete will be viewed with newer, more appreciative eyes.
“There are ways to actually repurpose those with refreshes, because we might as well try to hang on to the inventory that we do have and redevelop them to make them so that they can cater more to today’s world,” Hsiao said. “Maybe that inventory isn’t going to suddenly go away. Particularly for owners who have older assets, that might be a silver lining to supply not being great.”
