As the US population ages, the demand for senior living facilities is growing rapidly. This presents attractive investment opportunities in the senior living real estate sector. Key factors to consider include favorable demographic trends, market barriers to entry, business model economics, and finding the right operating partners. Strong markets tend to be in coastal cities with high home prices. REITs like Welltower utilize data analytics to enhance operations. Different ownership structures balance risk versus reward. Overall, senior living tends to be resilient across economic cycles relative to other property types.
Favorable long term demographic trends create growing demand
The aging US population, especially the over 80 cohort, is projected to grow rapidly for decades. Higher life expectancies combined with the large baby boomer generation entering retirement years leads to more seniors needing living assistance. Importantly, today’s retirees also have more wealth and income compared to prior generations. This supports the ability to pay the rents and fees required to live in professionally managed senior housing.
Target high barrier markets with limited new supply
The senior living industry has relatively low barriers to entry, making careful market selection important. Welltower focuses investments in major coastal metro areas like Los Angeles, New York, and San Francisco. High home prices and restrictive zoning limit competitors. These cities also benefit from stronger population growth among seniors. From 2010-2018, Welltower’s target markets saw 5 year population growth of 3.9% overall and 14.2% for age 75+ residents.
Utilize data analytics to enhance operating performance
Since senior living facilities require specialized operational expertise, REITs like Welltower utilize third-party operators. To maximize returns, Welltower employs data analytics to incentivize partners, improve marketing and cost efficiencies, and right-size staffing models. After iterating incentive structures over multiple versions, RevPOR growth improved from 2-3% historically to 6.6% in 2014.
Balance risk versus reward with RIDEA ownership
The RIDEA structure allows REITs to share in upside profits, but also exposes them to operating risks. From 2014-2019, RIDEA portfolios underperformed relative to more stable triple-net leases. But over the past decade, optimizing RIDEA incentives and focusing on top metro markets has improved the risk-reward profile.
Favorable demographics combined with focus on high barrier coastal markets can drive attractive risk-adjusted returns. REITs enhance economics through value-add initiatives and RIDEA structures. However, prudent underwriting and finding best-in-class operating partners remain critical.