As a relatively young industry, senior housing development in US took flight in the early 1980s when developers and investors recognized the potential to benefit from the anticipated surge of the elderly population in the United States . Now the senior housing sector is emerging as an increasingly attractive investment opportunity, because of its favourable demographic fundamentals and the achievement of higher yields relative to conventional apartments.
The senior population, defined as persons age 65 and older, is growing at twice the national average, with many baby boomers entering retirement.Consequently the senior housing market is expected to transition from a niche market to a major specialized market, with the long-term outlook for this property sector becoming increasingly positive. Occupancy levels for senior housing assets rebounded from lows recorded in 2001-2002 to near 90% today in many metro areas. Operating business models are better-defined, contributing to strong revenue growth and higher profit margins. Annual rent growth in the sector remains a healthy 4% to 5%.
In response to improved operations and increased investor 's interest, asset prices are increasing to record levels while cap rates are falling to single digits, ranging from 7% to 9%. The cap rate spread between senior housing and conventional apartments has declined from 300 basis points (bps) to 150-175 bps.
Since the senior housing market is driven by surging senior population and not directly related to external economic factors such as economic growth and the unemployment rate, the addition of senior housing assets to a portfolio could increase diversification and lower market risk. Different investment strategies are outlined and discussed.