The U.S. senior housing opportunity: investment strategies.

Target the Cost-Sensitive Middle Market: Many baby boomers subsist on moderate, fixed incomes, and do not want to live above their means. For this group, active senior housing could provide an economically prudent lifestyle. In a form of housing cost arbitrage, many empty-nesters realize that they have more house than they need, which may prove expensive to maintain. Notably, many empty-nesters' homes are located in high property tax jurisdictions in the Northeast. By selling their homes and buying new residences that are smaller and more energy efficient, we believe that baby boomers can accumulate significant equity while living more cost-efficiently.

Retirement Communities Near College Campuses: A unique investment strategy is the development of senior residences aimed at university alumni wishing to live near their alma maters. With a wealth of educational and recreational offerings, universities have clear potential to attract alumni to the vicinity. Because such alumni tend to be well-educated, affluent and willing to donate, universities should benefit greatly from their presence.

Strategic alliances and joint ventures with universities are especially attractive because colleges have the credibility, capability and potential for comparatively lower land costs. In 2005, Hyatt, in conjunction with Stanford University, built a $170 million four-story upscale retirement residence in Palo Alto, California. Current residents include two Nobel laureates, a former Cabinet member, and the inventor of the cherry-picker truck. Similar new developments have sprung up near Cornell University in Ithaca, New York and Dartmouth College in Hanover, New Hampshire. It is likely that this trend will continue and attractive investment opportunities will arise near other renowned college campuses.

Opportunity to Build Brand Equity: The senior housing industry is highly fragmented with no single player dominating the market. We believe that the continued consolidation of owners and operators is likely. Opportunities exist to gain market share and build a national brand through strategic portfolio and property acquisitions.

Partnering with a Seasoned Operator: The senior housing sector, with the exception of the active adult community segment, is service-oriented and, as such, operating efficiency is critical to achieving target profit margins. Further, due to frequent turnover of units and a slow initial lease-up period, strategic marketing is essential to reaching and maintaining target occupancy rates. A large, well-established operator can leverage its experience and economies of scale to achieve high occupancy levels and operating margins.

The senior housing industry is still relatively young and investors are still in the process of learning to understand the industry. Thus in choosing an operating partner, it is essential to review the potential partner's management experience and financial position. Because most senior housing operators have less than 20 years of operating experience, a thorough credit evaluation and review of auditor opinions can prove informative. Just as diversification by property type is important to ensuring a healthy investment portfolio, diversification by partnering with several operators can similarly mitigate operating risk.

ENDNOTES

(1.) The Case for Investing in Seniors Housing and Long Term Care Properties, National Investment Center for the Seniors Housing & Care Industries, 2001.

(2.) Ibid.

(3.) Ibid.

(4.) American Seniors Housing Association (ASHA)

(5.) U.S. Census Bureau.

(6.) Ibid.

(7.) Ibid.

(8.) Ibid.

(9.) Moody's Economy.com.

(10.) National Center for Health Statistics.

(11.) U.S. Department of Housing and Urban Development.

(12.) Assisted Living Federation of America (ALFA).

(13.) National Investment Center for the Seniors Housing and Care Industry (NIC).

(14.) The State of Seniors Housing, American Seniors Housing Association (ASHA), 2007.

(15.) F.W. Dodge, McGraw Hill Construction Dodge, 2007.

(16.) Ibid.

(17.) Developing, Leasing and Managing Healthcare Real Estate, Building Owners and Managers .Association (BOMA) International, 2003.

(18.) Ibid.

(19.) ASHA 2007 survey: Largest 50 U.S. Managers/Largest U.S. 50 Owners.

(20.) NIC.

(21.) Ibid.

(22.) Ibid.

(23.) The State of Seniors Housing, ASHA, 2007.

(24.) Arthur E. Gimmy, Susan B. Brecht and Clifford J. Dowd, Senior Housing, "Looking Toward the Third Millennium," The Appraisal Institute, 2003.

(25.) NIC.

(26.) Ibid.

About the Authors

David Lynn, Ph.D., is a managing director of ING Clarion Partners and head of the firm's U.S. Research and Investment Strategy group. He is responsible for the strategy and research support for portfolio managment, acquistions and marketing services. He has more than 20 years of real estate investment experience.

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Tim Wang, Ph.D., is a vice president of ING Clarion Partners and senior investment strategist at the firm's U.S. Research and Investment Strategy group. He is responsible for macroeconomic analysis, portfolio strategies, market forecast and client services.

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BY DAVID LYNN, Ph.D. AND TIM WANG, Ph.D.