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Senior housing at a glance

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Senior housing is a unique real estate investment opportunity due to demand factors that are independent of consumer demand, business cycles and interest rates.

The Heritage Tradition, located in Sun City, Ariz., sold for a record $203,135 per unit in July 2002, as part of the Ryerson/AEW CalPERS joint venture negotiated by CBRE Senior Housing Services.

Regardless of market, economic or financial movements, people get older and have increasing health needs. The national expenditures for health care services in the United States exceed $1 trillion. Senior housing investments have anticipated long-term stability of earnings and the systematic risks generally appear favorable over the long term.

Performance is based upon the aging of the population and is not strictly correlated with economic and business cycles. This offers diversification benefits for institutional investors' portfolios.

Senior housing trends

Several factors are worth mentioning that contribute to the strong outlook for the senior housing industry:

• Increasing awareness and acceptance: As society is familiarized and educated with alternatives in senior housing, there is a growing understanding and acceptance of senior housing, particularly assisted living facilities.

• Increasing life spans: Senior citizens are healthier than ever before in our history and the average life span is expected to continuously increase over the next 30 years. People that live to age 65 have a much greater chance living through their 70s and 80s than in years past. Healthier lifestyles and medical breakthroughs extending and enhancing the lives of people with a myriad of health conditions continue to be significant factors in this trend.

• Increasing wealth: Senior citizens are wealthier than they've ever been. Americans have the lowest proportion of seniors at the poverty level. People are saving and planning more for retirement than ever historically. The median income for families over the age of 65 in the United States is greater than $32,000. For senior citizens over the age of 75, the median income is greater than $23,000.

• Changing family dynamics: The propensity of families to be two-income producers, as well as the proliferation of single parents raising children alone, both hinder an adult child's ability to care for one or both parents or elderly family members. The result is that seniors may have to take advantage of senior housing instead of living with family members.

• Aging population: Undoubtedly, the most important factor leading to growth and demand in the senior housing industry is the overwhelming demographic statistics of the aging population worldwide. ?The growth of the senior population has increased dramatically in the 20th century. Senior citizens have increased in both percentages of population and in absolute numbers.

In 1900, there were 3 million people age 65 years or older, comprising a 4.1 percent share of the United States' population. By 2004, the total number of elderly people reached more than 35 million people, accounting for approximately 12 percent of the United States population.

??The number of people over the age of 85 who are expected to require some degree of assistance with daily living in the United States is expected to increase by 42 percent over the next 10 years and by an additional 32 percent in the following decade.

• Long-term care insurance: Long-term care insurance is a vehicle that more Americans are recognizing is a necessary safeguard for their future financial well-being. Each year, more citizens are purchasing long-term care insurance, further ensuring the strength of the private pay senior housing sector.

Senior housing has five distinct accommodation and services types:

Senior apartments -- age-restricted apartment communities that require residents to be age 65 or older.

Congregate care/independent living -- units designed for senior citizens who pay for some congregate services (i.e. housekeeping, transportation, meals, etc.) as part of a monthly fee or rental rate, and who require little or no assistance with activities of daily living;

Assisted living -- designed for frail senior citizens who need assistance with the activities of daily living (i.e. bathing, dressing, eating, etc.) but do not require continuous skilled nursing care. Unlike independent living homes, assisted living homes must be licensed and are therefore required to serve three meals and two snacks a day as part of the monthly unit rent;

Alzheimer's assisted living -- facilities specializing in the care of senior citizens with Alzheimer's and/or other related dementia; and,

Skilled nursing -- facilities that provide licensed nursing care and related services for residents who require medical, nursing or rehabilitation services.

Investment demand for senior housing properties has intensified as real estate investors are desperately seeking yield in a real estate investment market where apartment capitalization rates hover around 5 percent.

Investment companies (private equity and institutional) are flocking to the senior housing sector in search of "yield." There are many new entrants to the sector this year. As much of 60 percent of the final bidders for recent offerings have been first time investors within the sector.

Real estate investment trusts (REITs) are also back into the market in 2005, having been out of the market for prior years. REITs historically provided much of the market liquidity and sellers missed them sorely when they disappeared in late 2000 through early 2002.

In addition pension funds, through their investment advisors, are increasingly investing in the senior housing market.

Large senior housing management companies are coming back into the market. They have spent the last couple of years on the sidelines because many had weak balance sheets and could not secure acquisition capital. Now, they have fixed their problems and are able to secure growth capital.

As a result, smaller operators who have had their pick of the acquisition opportunities in the market the past couple of years will find it hard to compete for acquisitions against these large and well-capitalized chains.

Sunrise Senior Living and Brookdale Living Communities, funded by investment capital sources, will continue to grow their portfolios of managed communities through acquisitions.

Also, small regional investors will continue to purchase skilled nursing facilities in their local market areas. Investor groups' managers, such as Meridian Realty Capital, have experienced increased interest level among private equity investors, as other real estate asset classes are not providing enough yield compared to senior housing real estate.

We expect an increase in acquisitions through syndicated offerings to occur in 2005, as the senior housing market sector becomes more established.


Widmier is a senior vice president in CB Richard Ellis' Senior Housing Group and has over 17 years of experience in the real estate industry.

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