The Four Dimensions of Investing in Seniors Housing and Healthcare Real Estate
CNL Healthcare Properties II intends to strategically capitalize on several long-term shifts in the United States, which are combining to make seniors housing and healthcare real estate an attractive investment opportunity. Collectively, these can be thought of as the "4Ds."
The U.S. population is steadily getting older and living longer. This demographic trend will continue for the next several decades and will trigger corresponding shifts in the real estate required to house and care for aging residents. According to the U.S. Census Bureau, the seniors population will more than double between 2015 and 2060. During this period, more than 12,000 people will turn 65 every day.2
The seniors population is anticipated to increase by 105% from 2015-2060
2 “U.S. Population Projections: 2014–2060,” Population Projections, U.S. Census Bureau, Dec. 10, 2014.
Demand for Healthcare
As a result of demographic shifts and ongoing chronic illnesses, healthcare spending is projected to continue rising, both in absolute terms and as a percentage of the U.S. gross domestic product (GDP). National healthcare spending is projected to increase from approximately 16 percent of the GDP in 2013 to approximately 25 percent by 2040.3 This growing demand for care increases with age, and will drive the need for new medical office buildings, acute-care and post-acute care facilities and other types of healthcare real estate.
Annual physician office and hospital outpatient visits increase significantly with age4
Similarly, the demand for seniors housing continues to rise. Yet the new supply of these buildings is not keeping pace. In fact, a 173 percent growth in seniors housing units per year from 2020–2030 is needed to address the projected demand.5 It is important to note that this also could increase competition and may impact the availability of real estate investments and suitable tenants.
Strong demand, limited supply growth in seniors housing5
Growth rate is based on projected demand from 2020–2030. Factors could cause actual results to vary materially from those expressed in forward-looking statements.
3 The 2015 Long-Term Budget Outlook, Congress of the United States Congressional Budget Office, June 2015.
4 Medical Office Research Report, Marcus & Millichap, 2015.
5 American Seniors Housing Association, A Projection of Demand for Market Rate U.S. Senior Housing 2010–2030, Winter 2013.
Delivery of Care
Recent developments in the healthcare industry — including new technology and the reforms of the Affordable Care Act — are changing the way hospitals and physicians deliver care to patients. There is a greater emphasis on value and efficiency, as well as continued pressure to reduce healthcare costs and reduce exposure to Medicare and Medicaid reimbursements. As a result, healthcare providers are treating more patients in outpatient facilities rather than in hospitals. Nearly two-thirds of all surgeries no longer require an overnight hospital stay, thus impacting the need for appropriate real estate.6 For example, greater outpatient care requires far more facilities such as medical office buildings and surgical care centers, which tend to be more convenient and are often preferred preferred by patients.
Outpatient surgeries have increased more than 40 percent over the past two decades6
Past performance is not indicative of future results.
6 Trendwatch Chartbook 2015, American Hospital Association, March 2015.
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Durable Asset Class
While many real estate sectors are impacted by macro-economic events that cascade down to a particular market, seniors housing and healthcare real estate is largely non-discretionary or “needs-based,” mostly insulating it from economic drivers. This is why the healthcare employment growth rate has remained steady at approximately 2 percent per year, whereas all other sectors saw a change in employment numbers that mirrored economic trends over the past decade.7 In addition, investments in seniors housing real estate assets have proven to be a durable strategy as the average annual asking rent for seniors housing units has outpaced inflation.8,9,10
Steady growth of healthcare employment sector7
The 2009–2015 average annual asking rent for seniors housing has outpaced inflation8,9,10
7 “Consumer Employment Statistics," U.S. Bureau of Labor Statistics, accessed on Feb. 11, 2016.
8 “Consumer Price Index," U.S. Bureau of Labor Statistics, accessed on Feb. 16, 2016.
9 NIC MAP® Data Service, National Investment Center for Seniors Housing & Care, 2Q 2015.
10 This is not indicative of how an investment in CNL Healthcare Properties II will perform in relationship to inflation. There is no assurance the asking rental growth rate will continue to increase or will not reverse itself in the future. Seniors housing rental rates have not outpaced the consumer price index growth rates for every calendar year. Trends for seniors housing rent growth rates differ based upon the supply and demand experienced in varying geographical regions.
There are significant risks associated with the seniors housing and healthcare sectors, including market risks impacting demand, litigation risks and the cost of being responsive to changing government regulations. The REIT’s success in these sectors is dependent, in part, on the ability to evaluate local conditions, identify appropriate opportunities and find qualified tenants or, where properties are acquired through a taxable REIT subsidiary, engage and retain qualified independent managers.