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Senior Housing Investors
The Longevity Wave & the Financial Storm: Finding Opportunity in Senior Housing
Senior housing faces a "double whammy" of challenges from dramatic interest rate increases and persistent tariffs on construction materials, yet demographic trends still make it an incredibly strong long-term investment opportunity.
• Interest rates have jumped 200-300 basis points higher than pre-pandemic levels, significantly increasing the cost of capital
• Construction material costs have risen 15-25% due to tariffs, particularly affecting specialized components needed in senior living
• Transaction volumes have dropped 35-40% as buyers seek discounts while sellers remain anchored to pre-interest rate hike valuations
• New construction starts are down 45% from their peak, limiting new supply through at least 2025-2026
• By 2040, the 80+ population will double from 12 million to over 24 million people, creating overwhelming demand
• Secondary markets offer cap rates 75-150 basis points higher than primary markets, providing a cushion in higher interest environments
• Needs-based care models like memory care show greater resilience due to stronger pricing power
• Market dislocation is creating opportunities to acquire properties at 15-25% below replacement cost
• Technology investments like AI-powered staff scheduling can save 5-8% on labor costs
• Energy independence initiatives through solar and battery storage can reduce utility expenses by 40-60%
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So it sounds like the message here is that, while there are definitely some challenges, the long-term outlook for senior housing is actually quite strong.
AI:Absolutely. Those demographic trends are just too powerful to ignore.
AI:And this current market dislocation could create some really unique opportunities for those who are paying attention.
AI:Exactly, it's about having that long-term perspective.
AI:Right.
AI:And really understanding those fundamental drivers of demand.
AI:I think it's clear that, while the industry is facing some headwinds, those fundamental drivers of demand remain incredibly strong. Absolutely Right, because this isn't just some niche industry.
AI:No, it's not.
AI:This is something that affects all of us.
AI:It does yeah, because we're all getting older.
John Hauber:Welcome to the Senior Housing Investors Podcast. If you are an owner operator, investor, developer or buyer of senior housing, you've come to the right place. The best way to stay connected with us is to sign up for our weekly newsletter at havenseniorinvestmentscom. This podcast doesn't exist without you, our community. Thank you for listening and reach out to us anytime. And reach out to us anytime.
AI:Okay, so you sent over this report on senior housing.
Speaker 2:Yeah.
AI:Senior housing in a high-cost economy, navigating interest rates and tariffs.
AI:Yeah.
AI:And it's quite the read.
AI:So that's what we're going to unpack right now. This is a deep dive, for sure.
AI:So, right off the bat, the thing that really jumps out at me is this idea of the double whammy.
AI:Absolutely.
AI:You've got this really significant increase in interest rates.
AI:Right.
AI:We're talking 200, 300 basis points higher than before the pandemic.
AI:Right Two to three percentage points.
AI:Two to three percentage points. Yeah.
AI:Big jumps.
AI:That's a big deal. And then on top of that, you've got this persistent issue with tariffs Right that have driven up material costs. Yes, something like 15 to 25 percent.
AI:Absolutely, and it's a tough situation for senior housing in particular.
AI:Yeah, so let's break this down. Let's start with the interest rate piece. Okay, because it's not just, you know, some abstract financial concept, right? This has a very real impact on the cost of capital for these senior housing projects, exactly Whether you're talking about a new development or refinancing an existing property.
AI:It affects everything, yeah.
AI:Borrowing money is just much more expensive.
AI:Yeah. So what happens is you have this thing called cap rate expansion.
AI:Okay.
AI:And it's kind of a ripple effect from those higher borrowing costs. Okay, so essentially a property that generates the same amount of income before is now worth less because investors want a higher return to kind of offset that risk.
AI:Right. They need to be compensated for that.
AI:Exactly, and the report specifically mentions a potential shift from a 5.5% cap rate back in 21 to 7% or even higher today.
AI:Okay, so that's a pretty significant shift.
AI:Yeah, you can see how those higher interest rates are putting a damper on property values.
AI:Yeah, it's like the price of entry has just gone up, making it much harder to make deals work financially.
AI:Exactly, and what we're seeing now is this gap emerging between buyers and sellers. You know, sellers are kind of anchored to those pre-interest rate hike valuations.
AI:Right, they're thinking back to the good old days.
AI:Exactly While buyers are having to factor in this new reality.
AI:Yeah, this new reality, yeah.
AI:This more expensive landscape.
AI:How do you bridge that divide?
AI:Well, the report points to an increase in deal. Restructuring.
AI:Okay.
AI:So you're seeing more and more buyers and sellers having to get creative.
AI:Yeah.
AI:Finding that middle ground, so transactions can actually move forward.
AI:Right. So they have to kind of come to some kind of agreement.
AI:Yeah, they got to make it work somehow.
AI:Okay, so we've talked about the interest rate side of things, right. Yeah, they got to make it work somehow. Okay, so we've talked about the interest rate side of things Right. Now let's dive into those tariffs, because they seem to be sticking around.
AI:Yeah, it seems like those global tensions are keeping those taxes on imported construction materials really high.
AI:Yeah, and what's interesting is that it seems like senior housing is getting hit especially hard.
AI:It is because, unlike a typical apartment building, you know senior living communities, they often need these very specialized components yeah, higher grade finishes to meet all those specific needs of the residents.
AI:Right, You're thinking about things like grab bars and specialized flooring to prevent falls, Right? And you know commercial grade kitchens for the dining services. It all adds up.
AI:Exactly, and the report actually gives some really stark examples of how much those costs have junked. Yeah, we're talking 15 to 25 percent above pre-tariff levels. For things like For things like steel, aluminum, electrical components, HVAC systems, even the furniture that goes in those residence suites.
AI:Wow, ok, so what does that mean for the bigger picture, like, how does that impact the feasibility of these new development projects?
AI:Well, it's pretty simple when those raw materials become so much more expensive, it really squeezes those profit margins and projects that might have looked promising, you know, just a couple of years ago. Right, they're just not financially feasible anymore.
AI:So we're really facing this two-pronged challenge, right? Yes, more expensive borrowing and pricier building materials, right? So how is this actually playing out in the market, both for the developers trying to build new communities and for the operators that are running the existing properties?
AI:Yeah, the report actually makes this really interesting distinction. It calls it a bifurcated market response. Actually makes this really interesting distinction. It calls it a bifurcated market response. So we're seeing very distinct challenges emerging for new development versus the day-to-day operations of existing senior housing.
AI:So let's start with the developers. What are they up against?
AI:Okay, well, basically you've got this perfect storm brewing. We're talking about this 20% to 30% increases in construction costs since 2019. Yeah, and then on top of that, you've got this much more expensive environment to even get the capital to build Right. So that's a tough hurdle to clear.
AI:Yeah, so what are they doing about it? I mean, what are some of the strategies?
AI:Well, one thing is they're having to spend a lot more time on value engineering. It's basically trying to find more cost-effective ways to build without sacrificing the quality.
AI:Pointing corners.
AI:Exactly, and then they're also exploring alternative design approaches to try to keep those projects financially viable.
AI:So it's not just about the bricks and mortar. It sounds like Even getting these projects approved and entitled is taking much longer.
AI:Absolutely. The report actually mentions that it's exceeding two years in many cases.
AI:Wow.
AI:Up from the 12 to 18 months we used to see.
AI:So all that extra time just adds more cost, right?
AI:Yeah, more carrying costs, more risk, more risk. It just makes everything that much harder.
AI:So it sounds like new development is facing a pretty steep uphill battle.
AI:It is.
AI:But what about the existing properties? I mean, are they immune to all this?
AI:No, not at all. They're definitely feeling the pressure too.
AI:In what ways?
AI:Well, for one thing, there's this risk of refinancing.
AI:Okay.
AI:You know, if you've got a loan coming due in this higher interest rate environment, your debt service payments are probably going to jump significantly.
AI:Yeah, so that really puts a squeeze on your cash flow.
AI:Absolutely. And then beyond just the financing side, those tariffs are also impacting the ongoing operations.
AI:In what way?
AI:Well, the cost of everything has gone up.
AI:Like what kind of things?
AI:I mean everything from routine maintenance to capital improvements, replacement medical equipment, even the technology systems.
AI:Wow, so it's like across the board.
AI:Pretty much and somebody's got to absorb those costs right.
AI:Right. So is that just being passed on to residents?
AI:Well, the report makes a really important point about that. You know, if operators try to pass all those higher expenses directly onto the residents through rent increases, they could face some real occupancy challenges.
AI:Yeah, people are in pushback, Of course. Okay, so we talked about kind of the standoff between buyers and sellers in terms of valuations.
AI:Right.
AI:And the report actually puts some numbers to this, saying that transaction volumes have dropped quite a bit.
AI:They have, yeah, something like 35 to 40 percent compared to pre-pandemic levels.
AI:Wow, so that's a really significant slowdown.
AI:It is and it really highlights that disconnect we're seeing. You know, buyers are looking for those discounts to account for that higher cost of capital, right, but sellers are still kind of holding on to those pre-interest rate hike expectations.
AI:Still thinking back to the good old days, exactly. So what's interesting is? It sounds like we're actually seeing two separate markets emerge here.
AI:Sort of, yeah, what you might call a two-tiered market those properties that happen to have existing debt in place at those favorable pre-hike interest rates. They're now commanding a premium.
AI:So it's almost like the financing itself is more important than the underlying real estate.
AI:In a way, yeah, because buyers recognize the value of being able to assume that lower cost financing.
AI:That's fascinating.
AI:It is.
AI:Okay. So with all these challenges, all these headwinds, it seems like it would be a recipe for disaster.
AI:Yeah, you'd think so.
AI:But the report actually says that we haven't seen widespread distress in the sector Right. So why is that?
AI:Well, the key factor here is the underlying strength of senior housing.
AI:Okay.
AI:It's the essential nature of the services that they provide.
AI:Right. People need those services.
AI:Exactly. They need them, regardless of what's happening in the broader economy.
AI:It's not discretionary.
AI:Right, but, that being said, the margin for error has definitely narrowed.
AI:For both operators and investors.
AI:Yeah, absolutely.
AI:Okay, so we've laid out all the challenges here.
AI:Right.
AI:But now the report kind of shifts gears and talks about this really important concept, these long-term drivers of demand for senior housing. Right, it's not just some passing trend, no, these are fundamental shifts.
AI:Fundamental shifts yeah.
AI:That are only going to accelerate.
AI:Absolutely. So let's dig into that a little bit.
AI:Yeah, let's talk demographics, because that seems to be the big elephant in the room.
AI:It is. I mean, the numbers are just undeniable. By the year 2030, every single baby boomer will be at least 65 years old. We're talking about 73 million people.
AI:Yeah, that's a huge cohort.
AI:It is, and what's even more important for senior housing specifically is the growth in that 80 plus population, because that's really the prime demographic for these surgeses.
AI:So how much are we talking about in terms of growth there?
AI:Well, that segment is projected to double in size by 2040.
AI:Wow.
AI:From around 12 million to over 24 million.
AI:So that's more than double the demand in less than 20 years.
AI:Exactly, and it's important to remember that this isn't like buying a new car or, you know, going on vacation, right, this is a needs-based demand.
AI:People need this care.
AI:Exactly, the average age when someone moves into assisted living is 84. Okay, and the vast majority, around 70%, need help with at least two activities of daily living.
AI:So these aren't things that people can just put off.
AI:No, they can't.
AI:And if we look at the supplies lane, it seems like this high cost environment is actually having a pretty significant impact there as well.
AI:It is the report mentions that new construction starts are down dramatically by how much? Around 45 percent from their peak.
AI:Wow, that's a huge drop.
AI:It is, and when you consider the fact that it takes, you know, two to three years to actually build one of these communities, right, we're looking at a very limited amount of new inventory coming online.
Speaker 2:Right.
AI:Through at least 2025, 2026.
AI:So that creates a very interesting supply demand dynamic.
AI:It does. Yeah, you've got this huge wave of demand coming, yeah, and not a lot of new supply to meet it.
AI:So the report also talks about this concept of the sandwich generation.
AI:Right.
AI:These adult children who are kind of caught in the middle.
AI:Yeah, they're balancing their own careers and families, and then they're also having to to deal with the increasing caregiving responsibilities for their aging parents. Exactly, and and that's often a real turning point it makes professional senior care a much more attractive option.
Speaker 2:Right.
AI:And it could even lead to quicker move-in decisions.
AI:Yeah, because it's not just about the senior themselves.
AI:Right, it's a whole family decision.
AI:It's a whole family dynamic.
AI:Exactly so. You know we've talked about all these challenges, but I think what's really important to emphasize here is that, despite all that, these long-term demographic trends are incredibly powerful. They create a really compelling case for investing in senior housing for those who are in it for the long haul.
AI:So, given this environment we've described this high-cost environment what are some of the practical strategies that investors and operators can use to navigate these choppy waters?
AI:Yeah well, the report actually lays out some really interesting approaches, and I think one of the key takeaways is that, you know, the days of just relying on maximum leverage with floating rate debt are probably over, at least for now.
AI:Yeah, that sounds risky in this environment.
AI:It is so. We're seeing a shift towards more conservative and more flexible capital structures.
AI:So what does that look like in practice?
AI:Well, for one thing, fixed rate debt is becoming a lot more attractive, even if the initial interest rate might be a bit higher.
AI:Right, because you're locking in that rate Exactly.
AI:You're eliminating that uncertainty about future interest rate movements.
AI:So are there any specific types of financing that are particularly appealing right now?
AI:Well, the report specifically mentions financing through HUDY, fha.
AI:Okay.
AI:The Department of Housing and Urban Development.
AI:Okay.
AI:Because they offer these long-term, 35-year fixed rate loans.
AI:Wow, 35 years.
AI:Yeah, and they're non-recourse.
AI:What does non-recourse mean?
AI:It means that if the borrower defaults, the lender can't really go after their other assets.
AI:Oh, so it's less risky for the borrower.
AI:Exactly, and the rates are pretty attractive too, somewhere around 4.5 to 5%.
AI:Okay, so that's significantly lower than what you'd find in the conventional market.
AI:Yeah, definitely, so it's a very appealing option right now.
AI:So for those shorter term loans, those bridge loans, yeah. Are interest rate caps still a relevant tool?
AI:They are, but the cost of those caps has definitely gone up, right. So what we're seeing is a lot more negotiation around extension options.
AI:OK, so building in some flexibility.
AI:Exactly, you got to have some wiggle room.
AI:And what about the equity side of things, because it seems like that's also evolving.
AI:It is. We're seeing more creative solutions like preferred equity and mezzanine financing.
AI:Okay, so what are those exactly?
AI:Well, it basically helped bridge the gap between the amount of that senior loan and the total project cost, and while they come with higher interest rates you know, somewhere in the 10 to 14% range they can still be a more cost-effective alternative than relying solely on common equity.
AI:Okay, and I'm also seeing a lot more of these joint ventures, yes Between institutional investors and experienced operators.
AI:Absolutely. It makes a lot of sense in this environment.
AI:Yeah, because you've got the investors with the capital.
AI:Right.
AI:And then you've got the operators with the know-how. Expertise yeah To actually run these communities.
AI:So it's a win-win.
AI:So the report also talks about the need to reassess those leverage targets. Maybe look at some alternative sources of funding.
AI:Yeah, things like PACE financing or tax credits.
Speaker 2:Okay.
AI:Where it makes sense and then really be strategic about those interest rate protection strategies.
AI:Right those swaps and caps?
AI:Exactly so. It's all about finding that sweet spot between being adaptable in the short term and then maintaining that financial stability for the long haul.
AI:So we've talked a lot about the financial strategies, right, but what about the operational side of things?
AI:Yeah.
AI:Because it seems like operators are also having to get pretty creative when it comes to managing costs.
AI:They are, and what's interesting is the growing emphasis on using technology to do that. So the report highlights these AI-powered staff scheduling systems that can actually save a lot of money on labor costs.
AI:How much are we talking?
AI:You know, 5% to 8%.
AI:That's significant.
AI:It is. And then you've got those advanced building management systems with all those smart sensors that can reduce utility expenses, sometimes by as much as 12% to 18%.
AI:So it's about optimizing those everyday operations.
AI:Exactly Using technology to do it smarter.
AI:Right, and then on the construction side, it seems like there's a lot of interest in those alternative building methods.
AI:Yeah, because those traditional materials are just so expensive now. So we're seeing more modular and prefabricated construction techniques. Okay, because they can shorten those timelines by, you know, 20 to 30 percent.
AI:Right.
AI:And reduce that reliance on those imported materials.
AI:Right.
AI:And the report even mentions cross laminated timber. What's that? It's CLT. It's a domestically sourced alternative to steel.
AI:Interesting.
AI:Yeah, it could be, a game changer.
AI:So it's about finding those more resilient and cost effective solutions. And then, beyond the construction itself, there's this whole piece about managing the ongoing supply chain.
AI:Right, we're seeing more operators turning to group purchasing organizations.
AI:What are?
AI:those. They're GPOs. They basically leverage the buying power of a whole group to get better discounts from suppliers.
AI:Okay, so it's like a collective bargaining. Sort of yeah For senior housing operators.
AI:Exactly. And then there's also this idea of dual sourcing.
AI:Okay.
AI:So you're not relying on a single supplier for those key items.
AI:So it's about creating competition.
AI:Exactly and ensuring that you know you've got a backup if something goes wrong.
AI:And the report also talks about those energy independence initiatives. Yes, things like solar panels.
AI:Right.
AI:Code generation independence initiatives yes.
AI:Things like solar panels Right Code generation, exactly Battery storage, all that stuff, yeah, because not only can that reduce your utility expenses significantly, yeah. I mean some operators are seeing 40 to 60 percent reductions Wow. But it also gives you that backup power during emergencies.
AI:Right, so it's a win-win.
AI:Absolutely.
AI:Okay, so it sounds like to be successful in this environment, you really need a multi-pronged approach.
AI:You do. Yeah, you got to be thinking about capital structure, cost management, the whole nine yards.
AI:Now the report also talks about the importance of making strategic choices.
AI:Yeah.
AI:About which markets to focus on and what types of assets to invest in.
AI:Location, location, location, as they say.
AI:So where are those savvy investors looking right now?
AI:Well, the report points to secondary and tertiary markets as being very attractive right now.
AI:Okay, so why is that?
AI:The cap rates are significantly higher than in those major primary markets.
AI:How much?
AI:higher. We're talking 75 to 150 basis points higher.
AI:Wow, okay, so that's a pretty significant difference.
AI:It is, and it provides a nice cushion in this higher interest rate environment.
AI:And is it just about the cap rates, or are there other factors driving interest in those secondary markets?
AI:Well, a lot of those markets are also seeing some really favorable demographic trends, with people moving in from other areas.
AI:So the demand is there.
AI:Exactly. And then there's also the question of barriers to entry. Ok, you know things like zoning regulations or a limited supply of suitable land.
AI:So that limits the competition.
AI:It does and it can help protect against oversupply.
AI:Now, what about the types of senior housing assets? Are there any particular types that are more resilient in this environment?
AI:Well, the report highlights the inherent resilience of those needs-based care models.
AI:Okay.
AI:Things like memory care and higher acuity assisted living.
AI:Okay, so why are those so resilient?
AI:Because they have more pricing power.
AI:Okay.
AI:Particularly in an inflationary environment like we're seeing now.
AI:And are newer properties generally considered more desirable.
AI:They often are. Yeah, because they tend to have more energy efficient designs and they probably won't need as much in terms of capital expenditures in the near term.
AI:So the report seems to suggest that a good strategy right now is to target those value add opportunities.
Speaker 2:Yeah.
AI:In those secondary markets with strong demographics.
Speaker 2:Exactly.
AI:Where you can potentially unlock value through operational improvements.
AI:Yeah, maybe some strategic upgrades.
AI:Yeah, okay. So we've talked about the challenges, the strategies for navigating them, yeah, but the report ends on this note of optimism, talking about the potential opportunities that can arise from all this disruption.
AI:Right, because periods of market dislocation like this, they can create some really incredible opportunities for long-term investors.
AI:So what are we talking about specifically? What kind of opportunities?
AI:Well, one thing is the potential for strategic acquisitions.
AI:Okay.
AI:You know you might be able to acquire properties at a significant discount.
AI:Like how much of a discount?
AI:15 to 25% below replacement cost.
AI:Wow, that's pretty substantial.
AI:It is, and that's because some owners might be struggling with refinancing or just having a hard time with those tighter margins that we talked about earlier.
AI:Ok, and the report also anticipates a wave of consolidation in the sector.
AI:Yeah, probably over the next three to five years.
AI:So who's going to come out on top in that kind of environment?
AI:three to five years. So who's going to come out on top in that kind of environment? Well, it's likely going to favor those larger operators with economies of scale and strong access to capital.
AI:So the big guys get bigger.
AI:Pretty much yeah, and they'll be able to use that to expand their market share.
AI:And it's also worth remembering that these high interest rates and tariffs, right, they're not going to last forever.
AI:Exactly At some point. Inflation is going to moderate, right Interest rates are going to normalize, and that could be a huge boon for those who invest now.
AI:Right, because they can refinance later on.
AI:Exactly At those more favorable terms.
AI:OK, so beyond just the purely financial aspect, yeah, there's also this, this idea of the social impact of senior housing.
AI:Right.
AI:And the report mentions that there's increasing interest from impact investors.
AI:Yeah, they're specifically looking to align their capital with investments that are making a positive difference.
AI:Right, so it's not just about the bottom line.
AI:It's not just about the money, yeah.
AI:So it sounds like the message here is that, while there are definitely some challenges, yeah. The long-term outlook for senior housing is actually quite strong.
AI:Absolutely. Those demographic trends are just too powerful to ignore.
AI:And this current market dislocation could create some really unique opportunities for those who are paying attention.
AI:Exactly, it's about having that long-term perspective and really understanding those fundamental drivers of demand.
AI:Well, this has been a really fascinating deep dive into the current state of senior housing investment.
AI:Yeah, a lot to unpack.
AI:Yeah, we've covered a lot of ground here.
AI:We have.
AI:And I think it's clear that, while the industry is facing some headwinds, those fundamental drivers of demand remain incredibly strong.
AI:Absolutely. So what I would say to you, the listener, you know, think about those long term implications of this demographic shift. You know how is it going to reshape the way we think about senior care and investing in this sector?
AI:Right, because this isn't just some niche industry.
AI:No, it's not.
AI:This is something that affects all of us.
AI:It does yeah, because we're all getting older.
AI:Yeah. So how do we balance those short-term economic pressures with the undeniable needs of an aging population?
AI:That's the million dollar question.
AI:It's a lot to think about. It is Well, until next time.
AI:Until our next deep dive. Yeah, yeah.
AI:Thanks for listening.
AI:Thank you you.
