Demand for Dementia Care Spurs Development

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A recent Marcus & Millichap Real Estate Investment Services Report

Demand for seniors housing units is intensifying thanks to a rapidly improving housing market. The sharp increase in home prices over the past year fueled by historically low interest rates has boosted confidence among sellers and reduced the number of homeowners underwater on their mortgages significantly. According to housing tracker Zillow, the percent of homeowners that are upside down has plunged by 600 basis points year over year to 25.4 percent. The percentage change represents more than 2 million homeowners who have been freed from negative equity, providing the impetus for many seniors to sell and relocate into independent living facilities. In fact, occupancy in both independent living and CCRCs is anticipated to rise this year, spurring rent growth in both product types. Assisted living facilities will also record an increase of demand, though a wave of construction in some areas will cause the national occupancy level to retreat modestly. The Southeast and Texas, in particular, could see softening conditions due to the prevalence of newly constructed assisted living facilities, including many with dementia care units.

Buyers will be met with a greater number of listings in the coming months, which should help lift transaction velocity. Over the past 24 months, strong gains in rent and occupancy have generated healthier profit-and-loss statements. As a result, owners interested in divesting can prove a stronger operating history and list their properties at higher prices, and plenty of buyers await well-priced assets. Particularly, investor demand for assisted living properties, which make up nearly half of the seniors housing market, is currently insatiable. When combined with a dementia care unit, cap rates for these properties dip into the low-8 percent area, partially due to demographic trends. Currently, 40 percent of the population over the age of 85 has Alzheimer’s or related diseases, and that age cohort is anticipated to expand by 4 percent by 2017. At projected growth rates, 90,000 more seniors will be living with dementia in 2017, necessitating the need for additional facilities.

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