Active Adult Communities Gain Ground as Baby Boomers Age

Like many other sectors of the real estate industry, the seniors housing market is facing significant change. While many consider “seniors housing” as independent and assisted living –or the more intensive memory care and nursing home facilities – active adult communities are an emerging asset class that is gaining interest among developers and investors.

The property type was a hot topic among panelists at the recent 2019 NIC Fall Conference in Chicago. Active adult properties have the unique position of being age-restricted to those 55 and over, while offering amenities and services that resemble a mix of traditional multifamily and seniors housing.

Active Adult Properties Offer a Middle Ground

As a wave of baby boomers enter their 60s and 70s, seniors housing investors and developers over the last few years have realized the opportunity to capitalize on the expected influx of this demographic. Panelists at the NIC conference expressed that this demand will only grow stronger over time. The whole baby boomer cohort will be older than age 65 by 2030, according to the U.S. Census Bureau’s 2017 National Population Projections.

Active adult communities are appealing to baby boomers, as many are looking to downsize from their single-family homes. Panelists noted that this demographic might first consider a traditional apartment property, but they ultimately prefer to move into communities with people their age and where they have access to the services they want and need. Many baby boomers are also not yet a fit for an independent or assisted living facility.

The average age in those properties is around 84 years old, according to the American Seniors Housing Association, and many residents there need more intensive care or services.

Characteristics of Active Adult Communities

Panelist Zachary Crowe of investment firm The Carlyle Group noted that his company began targeting investments in the active adult space about five to six years ago. They realized baby boomers were about 15 years away from impacting the traditional senior housing space and needed a different kind of product for their lifestyle.

He noted that active adult communities are unique from conventional multifamily because they are often smaller communities, at about 120 to 160 units, due to their slower lease-up periods.

“Seniors have a much longer decision-making process, especially if they’re selling a home,” he added.

Like multifamily, however, there is a range of price points, from workforce housing to high-rise luxury buildings. Panelists agreed that knowing the market and demographics of the population is key to building the right type of product and having a successful lease-up.

Panelist Robert May of development firm Avenida Partners added that focusing on the lifestyle component is critical.

“We’re all trying to answer the three key questions: what do they want, what will they pay for it and how much does it cost to operate it?” he said. “The amenity side will get them to sign the lease; the service side will get them to stay. We’re trying to find that exact intersection between the residential and the hospitality.”

He added that the residents in active adult communities are ultimately looking for fun and experiences.

Strategies to Attract and Retain Residents

For May, his firm starts pre-leasing about nine months before a property opens and speaks to local owners and influencers to educate them on the need for the active adult product in the community.

Having these influencers on board can help bring in tenants and assist the community in tailoring events and services specifically to those residents.

He added that while absorption can still be a challenge, once residents come in, they stay for a long time.

Crowe agreed, noting that the average length of stay in his firm’s 15 stabilized properties is six to 10 years. The active adult space has among the highest lengths of stay for any real estate asset class. Typically, these residents will stay until they need a higher level of care, he added.

Attracting residents also requires a different approach than for traditional multifamily, Crowe noted. While multifamily leasing focuses on the property’s amenities and features, active adult leasing requires a more intensive, personal touch. These residents are often dealing with selling a home and downsizing, which can be a significant life change. Strategies include introducing the potential resident to the community and other tenants, as well as showing them the benefit of renting over owning.

May added that since 60% to 65% of his residents come from a single-family home, his firm recognized the need to have a staff member during lease up to guide residents through the challenges of downsizing.

Capital Markets Take on Active Adult

Panelists also discussed the capital markets’ interest in the active adult space. They noted that multifamily lenders are often underwriting the product similarly to apartment properties. Many lenders are utilizing Fannie Mae and Freddie Mac’s guideline that properties without a commercial kitchen could qualify for multifamily financing under one of their programs. Agency financing often offers higher leverage and lower interest rates, Crowe noted.

He added that like multifamily, lenders will want to see that the borrower has a track record, an experienced operator, and sales and marketing expertise in order to secure financing. However, the asset class’s strong fundamentals like high rent growth and occupancy rates are making it an attractive space to finance. While active adult cap rates are in line with multifamily cap rates, Crowe expects cap rates to decline further as lenders increasingly see the growth potential of the sector.

For more seniors housing insights, view our seniors housing research.