The senior-living industry will need support from institutional investors to meet growing capital demands, a recent report concluded.
The industry will require about $400 billion in capital over the next 35 years, according to a report prepared by Price Waterhouse for the National Investment Conference for the Senior Living and Long Term Care Industries.
The conference is a not-for-profit research group in Annapolis, Md. Its board of directors is composed of investors and lenders.
The report estimates the amount of capital invested in senior-living projects is expected to grow from $86 billion in 1996 to $126 billion in 2005 to $490 billion in 2030 (See chart).
Institutional investors, which include pension funds and life insurance companies, have typically invested in stocks and bonds in order to spread risk and keep close tabs on the performance of their investments. They tend to prefer investments that will yield solid long-term returns with little risk.
Glenn Mueller, an author of the study and national director of real estate research for Legg Mason Wood Walker in Baltimore, said pension funds and other large public investors are starting to take a closer look at senior-living and long-term-care companies.
Mueller said institutional investors shied away from the industry in the past because senior-living projects typically were not above their $20 million threshold. But now, he said, the industry is evolving from a lot of mom-and-pop operations into more consolidated companies that develop multiple projects.
The industry needs support from institutional investors, Mueller said, because they offer larger amounts and a more consistent source of capital than current sources, which are primarily local banks, private investors and the public equity market.
The report concluded the long-term-care industry bodes well for investors because of its predicted stable and strong demand over the next 25 years, its expected capital needs and the chance to gain expertise by investing early in a growing business.
Potential risks, the report cautioned, include oversupply, the uncertainty of national healthcare reform, defaults, bankruptcy, and inconsistent licensing regulations, building codes and zoning laws.
The report estimated the current demand for the three major income-producing, investment-grade senior housing categories-independent living, assisted living and private-pay skilled nursing-to be 1.78 million beds.
Over the next four years, demand is expected to increase by 100,000 beds, then rise to a total of 3.7 million beds by 2030, the report said. The population over age 65 is expected to increase from 33.8 million in 1996 to 69.4 million in 2030.
Another positive trend for the senior housing industry, according to the report, is increased life expectancy. The report said a 65-year-old could expect to live 17.2 more years in 1989, compared with 11.9 in 1900.
"Seniors housing is unique as a real estate investment opportunity," the report said. "Regardless of market, economic, or financial movements, people get older and have increasing health needs."
Noah Levy, a vice president for the Prudential Capital Group in Atlanta, agreed the senior-living industry is not as dependent on prevailing economic conditions as other commercial real estate projects, such as office buildings or apartments.
"The relative scarcity of the product and the growth in its demand make it a stable asset," Levy said. "The industry is out of its embryonic phase and into its growth phase."
Levy said Prudential Insurance Company of America has made $361 million in direct mortgage loans on 47 senior-living facilities across the country since 1989. Based on the positive demographic trends, he said, the company plans to step up its investments in the industry.
Levy said Prudential plans to make an additional $100 million to $200 million in mortgage loans on senior-living projects over the next 12 months.
During the same period, he said, the company also expects to make equity investments of up to $70 million of third-party pension fund money in independent-living, assisted-living and congregate-care facilities.
Ray Lewis, a research analyst with NatWest Securities in New York, said other pension-fund managers won't be far behind. He said the larger pension funds are likely to start funneling capital to the industry in the next 12 months.
"Pension funds are attracted to the stability that we're going to see from these facilities," Lewis said. "The age wave is relatively certain, and we're seeing stable revenues and operating structures in place."