Inside Active Adult: Market Trends and Valuation Insights

NIC Chats Podcast – Zach Bowyer 

Caroline Clapp:
Hi everyone. Welcome to the NIC Chats podcast series where we feature and interview thought leaders in senior housing and care. I'm Caroline Clapp, senior principal on the Research and Analytics team at the National Investment Center for Seniors Housing and Care, or NIC. So for those of you who may not be familiar with us, NIC is a not-for-profit organization whose mission is to enable access and choice for older adults by providing data analytics and connections that bring together investors, developers, operators, and third-party providers. 

You can access additional information on our website at nic.org, so thanks for listening. Joining me today is Zach Bowyer, head of Living Sectors Americas at Cushman & Wakefield. Zach is very active throughout the senior housing industry, including at NIC, where he participates in several committees and regularly speaks at our conferences and our events. 

So thanks so much for joining us today, Zach. 

Zach Bowyer:
Thank you, Caroline. It's a pleasure to join you. 

Caroline Clapp:
Great. So Zach and I are both Boston-based and it's a beautiful October day here in New England. Looking out my window, there's lots of fall foliage and sunshine. Perfect backdrop to dive into active adult communities where residents want enhanced lifestyle programming and amenities, such as walking clubs and dog parks and travel groups and overall wellness. 

But before we dive into some questions on active adult valuations and trends, Zach, can you please tell us a bit more about your background and your role today at Cushman and Wakefield? 

Zach Bowyer:
Thanks again, Caroline. Sure. My name is Zach Bowyer. I'm based in Boston and I sit on the valuation and advisory side for Cushman & Wakefield. My current role is I lead what we call our Living Sectors, which is essentially our global moniker for multifamily, but it includes all of the subsets—student housing, manufactured housing, affordable, and then of course senior living, which is where, prior to taking this role about four years ago, I focused exclusively throughout the U.S. and in the seniors housing and care sector.

Caroline Clapp:
Yeah. Great. Okay. That's very helpful. And so for Cushman and Wakefield, how long has senior housing been a part of the business? And then more recently, how about active adult? 

Zach Bowyer:
So senior housing—I started in the industry in 2004, so I guess for me anyways it's been a part of my business for nearly 20 years, which just still is shocking to hear myself say. It's been a part of our broader business at Cushman and Wakefield for as long as I've been in the business, both on the capital market side and on the valuation and advisory side. 

Just to give you an idea, within our broader living sectors business, we'll do around 15,000 valuation and market study assignments a year. Specifically on the seniors housing component, we'll value around a thousand, plus or minus, senior housing or care properties on an annual basis. 

Caroline Clapp:
Okay. That's a lot of activity. And then for active adult, you and I have been talking about different trends in active adult, and you told me there's been elevated interest from clients recently. So what's driving the volume in valuation requests for active adult, and where is the most interest coming from? 

Zach Bowyer:
Yeah, so active adult, in terms of what we're seeing being developed today, really was introduced to me about 10 years ago through the seniors housing side. And candidly, I was fascinated with that model. I viewed it as really having the potential to capture a segment of the broader senior housing market that wasn’t currently being captured by traditional or conventional senior housing properties. 

I've covered that active adult segment really closely for probably the past decade. When we talk about—to your question—where interest is coming from and the level of interest that we're seeing from the market, and when you think about conventional multifamily versus seniors housing, there's a lot of very unique opportunities and risk in each one of those property types. 

Just starting with seniors housing, we all know about that demographic tailwind—the silver tsunami. It's been a big topic of the sector for as long as I can remember. That demographic is truly finally not only at the doorstep, but starting to walk through the doors of our community. So very favorable tailwinds, which are driving very favorable occupancy trends. I think—what is NIC reporting now?—I think we're at 17 quarters of occupancy growth. 

Zach Bowyer:
I think that's right—somewhere plus or minus in the seniors housing space—and still very strong rent growth, 5%, some even up to eight, 10% in a lot of markets and some of the properties that we're seeing with that very strong investment returns. If you look at NAREIS reporting, one-, three-, five-, and even longer-term, seniors housing has achieved very favorable returns on investment. 

There's also a great deal of barriers to entry, making seniors housing attractive to investors. On the other hand, one of the risks—or maybe challenges, if you like to call it that—for seniors housing, I think, is the significant operational risk and regulatory environment that has kept a lot of investors, developers, and lenders away from the seniors housing sector. 

Now transitioning over to multifamily—so much less of a risk in the operating model, little to no regulatory oversight. Debt, liquidity, and cost are generally much, much more accretive to multifamily. The institutional investor, from a broader core strategy standpoint, is naturally, for those reasons, much more willing to go in—or I guess a better way to put it, there's a lot less of a risk that's associated with multifamily from an investment and operational standpoint than seniors housing. 

The downside of where multifamily is at today—there was a lot of construction coming out of the recent pandemic. So that sector is a little bit soft on the property market side relative to seniors housing. Somewhat muted occupancy levels, flat to very low rent growth, and still a lot of supply coming online that needs to be absorbed by the multifamily sector. 

When I think about where active adult fits in—for me, anyways—it checks a lot of those positive or opportunity boxes from each one of those property types. So when you're looking at seniors housing, you have the very favorable tailwinds or property market trends with rising occupancy, very strong rent growth, little new construction—suggesting that the strengthening occupancy and rent growth that we're seeing isn't going to slow down very soon. 

Active adult captures that tailwind, catering to that baby boomer demographic that is just starting to hit our sector. And then, on the operational side, at the same time—and I know we'll get into this in a little more detail—but active adult doesn't have that highly intensive operational risk or regulatory environment that seniors housing does, making it much more similar to multifamily from that component. 

Zach Bowyer:
And then the third point is on the capital market side. The majority of lenders, debt providers, and even equity—from a returns requirement—they underwrite active adult a lot more similar to multifamily. That makes underwriting deals, either for acquisition and probably even more importantly in the current environment for new construction, a lot more accretive for active adult, or a lot more similar to multifamily. 

So I think because of those reasons, we're seeing people who have always felt like, “Hey, I see that demographic tailwind. I understand the opportunity in seniors. I'm just not ready to go forward and really incur that operational and regulatory risk.” Well, now they can move into that segment with active adult without taking on all of that risk. 

So I think people are seeing that as an opportunity. 

Caroline Clapp:
Yeah, the fundamentals are great, as you described, and for NCREIF, the returns data, so a few years ago—a couple of years ago—NCREIF decided to break out senior housing into its own property subtype, and part of that has just been the investor interest in moving out of the four food groups of real estate and into some of the more niche sectors. 

Yeah, senior housing’s getting a lot of interest. And then 2022 is when NIC MAP began tracking active adult rental communities as well. So you talked about active adult for the past 10 years or so, and that’s how the NIC MAP data breaks out as well. We have inventory that was built in the 1980s and ’90s, but we typically think of those as the naturally occurring retirement communities, or NORCs, sometimes called the older products—age-restricted senior apartments. 

But then also NIC MAP has data for the more modern product that we’re talking about today, that was built in the last 10 years or so. And so that better fits NIC’s definition that we’ve worked on with lots of people in the industry regarding enhanced lifestyle programming. 

How does Cushman and Wakefield define the continuum of senior housing and exactly where active adult falls? 

Zach Bowyer:
Sure. So I would say, from looking at just the continuum of—let’s call it traditional or conventional—senior housing: independent living, assisted, memory care, skilled nursing, and then the life plan communities or CRCs, I would say we're very much aligned with NIC, which of course we prefer to be. 

Zach Bowyer:
And then, for active adult, it’s really interesting—and we still have a lot of discussions with market participants that start off with, “Okay, let’s really nail down what we’re talking about when we’re talking about active adult here.” And for us, we like to segment out the older 55-, 65-plus age-restricted apartment buildings. 

From our standpoint, from a valuation approach, from the profile of the consumer who’s moving into the buildings, your 55-plus age-restricted property is much more an apartment building that’s just targeted—either through a zoning requirement, some sort of affordability component, or otherwise—a specific age cohort. And a lot of the times, even just in what we call a 55-plus, 65-plus, it is even a different age demographic than what we’re seeing in an active adult property. 

So for us, active adult—this newer product that we’ve really noticed coming to market about 10 years ago, and we’ve seen it evolve over that timeframe—I think number one, the key component there is what you mentioned: that hospitality component, the additional services and lifestyle that this newer active adult product is offering over the 55-plus age-restricted piece. 

And then I also think that a lot of the original—probably not the best word, but strategy, if you will—behind active adult was, or I guess we’ll call it intention, to capture that otherwise independent living resident five to six years earlier in that process. We know the average age of entrance to an independent living property is around 82, 83 years of age. So that would say now we’re trying to capture that person in the mid-seventies plus. 

And so, to me, it makes a ton of sense to where you’re in your mid-seventies, you’re going, “Okay, I don’t really want to take care of my home anymore. I know that I’m going to need some level—or I’m interested in some level—of senior housing.” You go look at an independent living property and they’re going, “Okay, we have meal services, and that’s part of your rent. We have a van or a car service, or sometimes a transportation service—that’s part of your rent. We have housekeeping that’s baked into your rent, and then some other ancillary or à la carte add-ons that you have as an option.” 

And that early adopter resident—say in their seventies, mid-seventies—it’s easy for them to say, “You know what, I still like to cook. I still like to drive. I have my car. I don’t need housekeeping services and those items.” So while they like it and see themselves needing it at some point, they’re not quite ready to make that move. 

Zach Bowyer:
They would delay the move until their needs advanced to a level where they felt it appropriate. 

Active adult now—I know we call it, there we have IL lite, we have that range of how we're identifying this spectrum that we're talking about. But for me, I heard active adult once explained as “independent living unbundled,” and it makes a ton of sense to me. Through a concierge and other key employees that may be on-site and contracting out—so you’re not, as the owner or investor, having to maintain that level of staffing at a property level—you’re contracting it out to a third party. 

But it’s made available to that resident when they want it, right? And they pay for it when they need it. So the option’s still there. It’s not included in the rent, which to me makes it a little bit—or makes a lot of sense—that they would make that decision to move a little bit earlier. 

We can get into it a little bit deeper, but when I think about that customer or the person or couple or family who’s moving into an active adult property, for me, it’s your otherwise independent living resident who now sees active adult as the right option for them. That enables them to make that decision to move a little bit earlier. 

And we are seeing that in the numbers now. The average age of a move to this newer active adult product is that mid-seventies demographic. And then you flip it over to, again, getting back to the investor or operator side—that operational risk—that’s where that’s being de-levered, right? Because you’re not having to hire and maintain those staff people on-site. You have your one concierge or programming director that arranges the partnerships with all those third-party providers and makes it very easily accessible to that local resident. 

So you’re also delivering that operational risk. 

Caroline Clapp:
Yeah, that makes a lot of sense from a valuation perspective on the operator side. You talked about our definition at NIC—the way we describe the continuum is that active adult serves as a bridge between conventional multifamily apartments and then independent living or traditional senior housing. 

Caroline Clapp:
So a lot of operators really don’t want to be lumped in with senior housing or independent living, but I could see how, when you’re putting this into a spreadsheet—how you take the rents apart and what’s included—that makes a lot of sense. 

And then, just diving more into valuations, when we look at the NIC MAP data, occupancy rates for active adult rental—they’re pretty high for both the older product and the newer products. So we’re looking at properties that have been open for decades and are still very well occupied at 97% on average. And then the newer products that have been open five to 10 years—95%. 

The average national rate stabilized is almost 96%. Why is it important to distinguish between the two when you’re doing your valuation work—the older properties and the newer properties—if they’re both really well occupied? 

Zach Bowyer:
Yeah, so I think from a valuation perspective, there are a few components that drive value—number one being marketability of the property, right? 

So from that, what are you qualifying as your primary demand or your total addressable market? We’ll define a primary market area, and then within that primary market area, we’ll identify an age- and income-qualified cohort. 

From that standpoint alone, again, I think you’re getting a different age cohort and profile that’s looking at the older 55-, 65-plus properties and then these newer, amenitized, hospitality-type services and offerings. So that’s one differentiator there that we’ll pay attention to. 

And then over on the competitive supply standpoint, obviously we want to understand what the other competition is in that market, and then also how our subject property compares to that competition in terms of the rates that they’re charging. 

And just broadly speaking—this doesn’t apply to every property and every market—but typically you would expect to see your 55-, 65-plus property as a little bit more of an affordable-type product. So, if you’re benchmarking your otherwise equal property in terms of amenities and finish, etc., to multifamily, that age-restricted property’s rents are typically going to fall below your multifamily. 

Whereas this newer active adult property that we’re talking about—as a rule of thumb, what we’ve found to be the most consistent—is plus or minus a 20% premium on rent to multifamily, again, all else being equal in terms of amenities, finish, and location. 

Zach Bowyer:
Ideally for us, when we’re comping out our subject property, we would love to see five other active adult properties in that same market that are all occupied with very similar amenities and services. We know that’s not the case—active adult is a niche within a niche right now. So maybe you’ll get one or two other active adult properties in the broader MSA that you’re working in. 

So for us, our primary comp set will actually be conventional multifamily. We’ll look at other multifamily properties within that direct or identified primary market area, we’ll get those rents and those occupancies, and then again, we’ll expect to see about a 20% premium on the rents for our subject property. 

In terms of how age-restricted properties would come into play, we’d certainly use that as a secondary comparable set, but again, that would be the floor. And then we also like to look at independent living comps to gauge occupancy and then a ceiling on the rents. But that premium—or the next step to independent living—is typically going to be significantly higher again, because you’re including a lot of those additional services in that base rent. 

Caroline Clapp:
Yeah, that’s what we’re hearing from the industry as well. What we’re hearing from people who are interested in moving into active adult is they’re looking at that rent premium to conventional multifamily, and that’s attracting them to come in—more than senior housing—moving down the continuum to capture active adult communities, at least for the moment. That seems to be the main trend. 

Zach Bowyer:
Yeah. 

Caroline Clapp:
We’re spending a lot of time putting together resources to educate the investment industry on active adult and what it is and all the differences that you described. You talked a bit about your comp set. You and everyone on your team at Cushman, when you’re doing your site visits, are there any particular trends that you’re noticing? 

It used to be that some properties had, for example, continental breakfast that they included in their rates, but overall they typically don’t. The rates do not include meals. There might be some happy hours or maybe a coffee, tea, pastry-type daily setup—or cookies, something like that. 

Caroline Clapp:
But what do you see maybe food-wise or anything else when you go to do your site visits today with these properties? 

Zach Bowyer:
It really is fascinating. From a building design standpoint, I would say they’re much more similar to a newer, highly amenitized multifamily property—maybe a little bit of a premium on the finishes, a little bit larger common areas. But in terms of the amenities being offered, again, it’s very similar to conventional multifamily. 

The staffing, I think, is a critical component of active adult. I think your marketing director has to have much more of a traditional senior living-type approach to marketing. Your average resident isn’t just going online, comparing rents and pictures, and then signing their lease online. 

I think there still is a more active marketing and sales process from that component. And then also, making sure—whether it’s a concierge or some other sort of activities director or programming person—I think that social aspect is a very important component of the success of the property from an occupancy standpoint. 

We are starting to see various levels of brands where I think some of the earlier—again, we’re calling it the newer active adult—as you mentioned, they had some sort of continental breakfast or lunch offering. That’s being replaced with another type of amenity that the residents are using more of. 

But because of a lot of, again, the larger amenity spaces and some of the design components, I think the pricing for those properties was probably more upper-income cohorts that were affording that. And now you’re starting to see the emergence of various middle-market brands. 

Of course, the amenities and quality will be a little bit more reduced there and so on. But again, I think if you walked into a new active adult property and a new multifamily property, you’d have to look closely to be able to tell the difference. 

Caroline Clapp:
Yeah, that makes a lot of sense on the staffing as the differentiator, because the lease-up process is longer than multifamily. Like you said, they’re not signing a lease online without looking—it’s multiple visits. Often the resident is making their first downsizing move from their single-family home that they own. 

Caroline Clapp:
So it’s a big decision. You need the staff that is involved in the lease-up process. And then once you’ve got a property leased up, there’s retention also. So why wouldn’t you just move to conventional multifamily at a cheaper rate? It’s the lifestyle program—and it’s not only the amenities, but all of the sort of lifestyle and engagement coordinator who might be on-site, and then the resident-led programming as well—that makes these properties really stand out. 

And then you started to touch on differences in brands. So valuation-wise, let’s talk a little bit about cap rates. Cushman has a really good report for senior housing and active adult showing a range of cap rates that you see today. And maybe a bit on—you could talk a little bit about unit valuations as well. 

But just generally, you look at primary markets, secondary markets—but just overall, on average—where are cap rates today compared to senior housing and multifamily, and then where do you think they’re heading? So what’s the opportunity for investors today? 

Zach Bowyer:
Yeah. As I mentioned, I’ve worked on the valuation and advisory side, almost solely focused on seniors housing for nearly 20 years. I now sit in a seat that gives me a broader perspective of our other property types. But even leading up to that, I always liked to look at or compare senior housing performance to multifamily or hospitality. 

And from my seat—or viewpoint anyways—I would say we’re in one of the most optimal times for investing specifically in seniors housing that we not only have seen but will see in a while. The reasoning for that is not only the tailwinds from a property market standpoint facing the sector, but also, and getting more directly back to your question—prior to, well, the COVID-19 pandemic really challenged the senior housing sector. We won’t go into that; we know why. But occupancy dipped significantly, so from an operational standpoint the sector was hit pretty hard. 

And then coming out of that, in a rising interest rate environment, that push in interest rates had a doubling-down effect on pricing for senior housing. 

So prior to that period, we followed spreads in multifamily cap rates to senior housing cap rates, and that trend—or that spread—year over year, slowly compressed. And a lot of that, I think, reflected the performance of senior housing and the recognition by the broader market of the tailwinds with our aging population. 

Zach Bowyer:
But I also think, too, just a lot of the work that NIC and others were doing to create more transparency in this sector—that’s helped take away a lot of the perception of risk. So we saw spreads between senior housing and multifamily get as low as 50 basis points. 

Say multifamily was at a five cap; we were seeing your otherwise equal independent or assisted living property come in around a five-and-a-half cap, right? And to me, that was really exciting to see for our sector—it’s becoming more and more attractive and accepted by your broader institutional investor. 

I mentioned the pandemic, and then the rising interest rate environment had a much more profound impact on senior housing. Today, we’re seeing those spreads closer to 100 to 150 basis points between multifamily and senior housing, all else equal. 

I think from a valuation standpoint, we’re already starting to see cap rates compress for senior housing. We spoke already about where occupancy levels are, the favorable rent growth trends—I think it’d be hard to make an argument that’s going to slow down anytime soon. 

Looking at our population and where construction starts are, there’s a really favorable long-term outlook, I think, for NOI growth relative to seniors. And then, from a pricing standpoint, looking at cap rates—cap rates for senior housing have a lot more room to compress than multifamily. 

So peak-to-trough valuations on seniors housing—we saw about 20%, plus or minus, impairment on senior housing valuations. I think we’re going to see a lot of that impairment be made up in the next one, two, three, five years, call it. And I think that’s a trend that’s going to continue even longer. 

Caroline Clapp:
Thank you so much, Zach. Zach Bowyer at Cushman—thanks for all your insights. The active adult rental community industry right now is still very fragmented. There are only a couple of large operators and a lot of smaller regional operators today. But as Zach mentioned at the top of the podcast, you do thousands and thousands of valuations at Cushman. 

So we really appreciate your insight today. Thanks very much. 

Zach Bowyer:
Caroline, thank you for having me. It’s always a pleasure. 

Caroline Clapp:
And thank you to our listeners. You can find other NIC Chats podcasts with many excellent guests on our website at NIC.org or anywhere else you listen to your podcasts, and lots of active adult data on our website as well, NIC.org. So thanks everyone, and goodbye for now.