One of the largest complaints about senior care and housing is cost. It is or can be, darn expensive. The best, most amenitized Life Plan projects can run hundreds of thousands of dollars to enter and tens of thousands more in monthly fees. Rates inflate typically, more than CPI each year. Lately, rate inflation has exceeded consumer inflation indices.
The largest and fasting growing economic market segment of seniors is middle income. This cohort is defined as annual income between $25,000 and $74,300 (annuitized value) for people aged 75-84 and for people 85 plus, annual income between $24,450 and $95,050 (annuitized value). Note: Annuitized value means income and assets that can be converted to income or liquified to provide consumable cash flow. The middle-income market is projected to grow to 43% of all seniors by 2029.
Data from a recently completed University of Michigan/National Institute on Aging study noted the following.
- About 60% of all seniors will have mobility problems and 20% will have high health care and personal care needs by 2029.
- Using $62,000 as the average annual cost of Assisted Living and out-of-pocket healthcare spending (I think this number is light) by 2029, 54% of seniors will not have the financial resources to pay for senior housing, even with access to their home equity.
- By 2029, 81% of seniors without home equity will have less than $60,000 per year in annuitized financial resources.
Some economists today believe this data to be misleading, understating where the senior population really is, financially. The pandemic and recent inflationary pressure combined with market selloffs and valuation shifts on fixed income holdings due to rising rates, has eroded senior estate values. While single family housing values have held steady, buyers capable of purchasing these properties have shrunk severely due to tighter lending conditions and mortgage rates holding near 7% for a 30-year mortgage. For perspective, the U.S. average 30-year mortgage payment in 2021 was $1,001, today it is $2,444. Real wages, year over year, have grown about 5%. The mortgage payment increase from 2021 is 244%! Not surprisingly, home sales are at record lows.
An illiquid real estate market is an issue for seniors in terms of accessing and paying for, senior housing. While their home values may not have yet eroded, accessing it in a market condition of rising mortgage rates, tighter credit conditions, and rising mortgage rates can be nigh on impossible. If as is currently the case, the residential resale market remains bottled-up for a longer period (very likely given Fed signals to continue rate vigilance and possible additional hikes), the middle-income group purchasing power looks more like the data point above for people without home equity – $60,000 or less in annuitized resources. In short, having equity is only as valuable as the ability to efficiently access it.
If the U.S. economy remains close to recession and interest rates remain high (above 6% which is proximal to the historic average for the period 1971 to current), senior housing affordability will have to become front and center in a way that addresses the overall growth of the middle-income market. A challenge here, however, can be found wrapped in the same dynamic of interest rates and credit conditions/borrowing conditions. Providers and developers at the moment are struggling with development options given higher cost credit and inflation on labor (construction), labor availability, and supply costs.
Creativity and adaptable re-use do show some alternative models. First, adaptive re-use is a method of taking existing property and repurposing it for senior housing. Rehabilitation is often cheaper and faster than new construction. Projects right now are going on in urban/ex-urban areas involving redevelopment of shopping centers/malls, into senior housing communities, though these projects are a bit more upscale in nature. Excess commercial office space (lots of it in some communities) also shows promise for repurposing. Partnerships may in fact, be more key than ever.
Getting costs down is about three main elements, cost of capital aside.
- Efficient, replicable design with multi-use spaces. Less common area, more rentable, useable spaces.
- Shared purpose platforms that can accommodate commercial uses via partnerships, negating the need for additional space built-in to the community and a source of cost offset/income. Medical practices, banks, restaurants, etc. are good examples.
- A keen focus on operating efficiencies once the project is built. Staffing and operating costs can be minimized by smart design, focused on how the project will function day in and day out. All too often, designs have been based on driving resident perception and creating resident focused spaces, etc. that drive inefficiency and underutilization. Space that is not used frequently and doesn’t generate revenue, generates costs to maintain.