Investors looking to grow, expand and take full advantage of the investment opportunities the senior housing industry will offer over time must inevitably come to grips with the different product options that await America’s aging population.
Cambridge Realty Capital Companies Chairman Jeffrey A. Davis says lenders and investors have sold themselves on lending and investing in senior housing primarily because of the industry’s favorable demographics. Growth of the 65 and older population has been expanding at a 13 percent annual clip, compared with a 3 percent pace for the population as a whole.
“Baby boomers continue to move into the age-appropriate area for senior housing at a rate that is expected to accelerate over the next 15 years. However, to this point, investors have mainly focused on properties that make sense from a commercial real estate perspective,” he noted.
“At the moment, an investment gap between skilled nursing facilities and assisted living facilities continues to widen. Investors today are drawn to assisted living facilities that are newer, with fewer regulations and less government oversight than skilled nursing facilities,” Mr. Davis observes.
Cambridge is one of the nation’s leading senior housing/healthcare lenders, with more than $5 billion in closed transactions. The company acquires both skilled nursing and assisted living properties through its Cambridge Investment and Finance Co. acquisition arm.
Mr. Davis identifies the major differences between skilled nursing facilities (SNFs) and assisted living facilities (ALFs) in this way:
“Mostly, SNFs were built in the 1960s and 1970s and tend to have an institutional look and feel. In contrast, ALFs were primarily built after 1970 and offer residents a residential look that has resonated with the senior population, and especially with their baby boomer children who have a much greater affinity for the look and feel of assisted living facilities.
“It seems that everybody prefers newer vs. older properties and newer neighborhoods vs. old. So age of the physical plant is a major data point for how investors and lenders view SNFs vs. ALFs,” he said.
Mr. Davis observes that lenders and investors with commercial real estate backgrounds are not used to third-party regulation and oversight. Their inclination is to stay as far away from these perceived problems as possible.
“From day one, SNFs have been heavily regulated. Required are annual surveys and surveys on demand. And owners must deal with the regulatory demands of both state and federal government entities.
“In contrast, ALFs have been lightly regulated and many states originally had no regulations at all. To this day the industry remains very lightly regulated,” Mr. Davis said.
Methods of payment are defining. ALFs rely almost exclusively on private payers, while 95 percent or more of SNFs are reimbursed by third-party payers, including Medicaid, Medicare, ACOs, managed care, HMOs and insurance companies, he explained.
In the last dozen years or so, some third-party payments have become part of assisted living packages. But they remain a minor component, he noted.
In the current cycle, more established senior housing investors have continued to fund skilled nursing homes, while new entries into the business have largely focused on independent living, assisted living and memory care properties. For the newcomers, ALFs are the clear winner today, but what about tomorrow?
“It’s probably going to take some time for investors and lenders to become more interested in highly regulated skilled nursing homes. But time is not on their side,” Mr. Davis said, adding:
“For seniors, affordability becomes part of the equation as greater demand for care and services increase with age. As the demand for skilled nursing facilities continues to expand with our aging population, investors who want to have an impact in this space will need to better understand the different options in order to participate in all areas of senior housing.”