Silver Tsunami or Fool’s Gold?

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By: John Ruffier

Much of the predicted strength and growth of the Senior Housing Market is predicated on the retirement of the Baby Boomers – a veritable silver tsunami of potential residents for senior living facilities. To meet that demand, construction of senior living facilities has increased. Further, many of the newly-created facilities come with high end finishes and previously unheard of amenities to meet the expectations of the Baby Boomers (the Greatest Generation, as survivors of the great depression, seem happier with less).  But, to mix metaphors, is all the excitement warranted, or is the industry setting itself up for failure?

Demographics certainly support this optimism as to overall demand: the US Census Bureau reports that between 2014 and 2030, the number of households in the 65- to 75-year-old range and the number over 75 years of age are projected to grow by 48% and 79%, respectively.

Further, those retiring seniors will bring a veritable tidal wave of assets with them into retirement, and an elevated level of household assets as compared to the previous generation. Baby Boomers have benefitted from graduating with a lower level of debt than current generations and entering into a relatively stable job market with good wages and benefits. JP Morgan reports that the Baby Boomers quadrupled their net worth since the late 1980s – in large part bolstered by a rising real estate market.

Still, there are some warning signs. The personal savings rate of the Baby Boomers (6%) is considerably less than that of the Greatest Generation (13%).   Even more concerning for the long term: the savings rate for Generation X is just 3% and Millennials are at -2%.

Further, much of Baby Boomers’ assets are tied up in real estate – and Baby Boomer’s median equity in their homes is only 62%. As many in the senior housing industry discovered during the last housing downturn, the loss of home equity and the ability to realize upon that equity upon retirement has the potential to negatively impact the ability of seniors to move into facilities.

Finally, even with the strength of Baby Boomers’ balance sheets, their financial assets plus social security will provide annual income streams considerably below their current annual consumption expenditures. Baby Boomers seem to sense this trouble. A recent CNBC poll reported:

  • Only 60% of baby boomers report having any retirement savings
  • 36% say they plan to retire at 70 or later
  • Only 27% are confident they will have enough for retirement

And perhaps most concerning from the CNBC poll:

  • almost a quarter said they had difficulty in paying their mortgage or rent in the last 12 months

So, does this mean that the industry is in danger and we are going to see half-full facilities struggling to remain viable? Right now, we don’t think so. There is still more than enough pent-up demand to satisfy a health level of capacity growth and we suspect that the spending habits of Baby Boomers will naturally decline as they age – less travel and less need for distraction as they slow down. But, what we think this does suggest is that a wise developer should focus on ways to value-engineer projects and really determine which amenities provide more than just an splashy impression on visitors. Besides increasing margins in the short-term, more efficient and less costly facilities may be the ones best positioned to weather future downturns by having the ability to cut rental rates and still maintain profitability.

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