The problem is, boomers haven’t much cooperated.
The supply of senior housing has soared in recent years after many investors struck on the same idea. The market has added more than 750,000 units since the end of 2012, double the number of new units added during the six years before, according to the nonprofit National Investment Center for Seniors Housing & Care.
But much of that senior housing hasn’t been needed.
Many in the generation born between 1946 to 1964 have remained fitter, more independent or stayed closer to their families than many developers anticipated. And since recent demographic data suggests people tend to move into senior-living facilities after they reach 82 years old—the oldest boomer won’t turn 80 until 2026—many of these facilities have arrived ahead of their time.
“What’s happened to the industry is that everyone sees the demand, and they can’t quite figure out exactly when to time it,” said Lucinda M. Baier, chief executive officer at Brookdale Senior Living Inc., the largest operator of senior housing in the U.S.
Occupancy rates for senior housing stood at 87.9% in both the second and third quarter—the lowest rate since 2011 when it reached 87.5%, according to NIC, which tracks market-rate properties.
Occupancy levels for assisted-living facilities, a category of senior housing, are also at their lowest levels since reporting on this data began in 2006, NIC said.
“There’s been a severe supply problem,” said Jeffrey Yurk, assistant portfolio manager who specializes in the health-care sector at Heitman’s North American Public Real Estate Securities Group. He has reduced investments in REITs with bigger exposure to senior housing.
In recent years, shares of Brookdale, a Brentwood, Tenn.-based real-estate investment trust, have tumbled following concerns of oversupply. Two activist hedge funds have also urged it to restructure leases and sell or spin off real estate that it owns at a faster pace.
Senior housing includes independent living and assisted-living facilities for residents who don’t require round-the-clock care. Those with more complex health conditions reside in nursing homes that have more specialized medical professionals.
The glut also reflects some developers overestimating the number of seniors who can afford these residences, which cost around $3,000 to $8,000 a month.
Seniors older than 80 are part of the so-called Silent Generation, which suffered through the Great Depression and World War II. Many remain more frugal and independent and resist moving into group housing, analysts say.
“We have enjoyed having our own house and not have regimented meals,” said 96-year-old Ed Chambers, who lives with his 99-year-old wife in a three-bedroom house in Wyckoff, N.J. Mr. Chambers, who uses a walker, said there is a volunteer board in his community so someone takes care of the snow-shoveling and lawn-mowing duties.
The supply growth hasn’t frightened off everyone. Mr. Yurk, Ms. Baier and many others believe senior-housing demand is coming and that boomers will eventually turn to these facilities.
Related Cos., one of the largest real-estate developers in the U.S., said this month it is joining with senior-housing manager Atria Senior Living to build more than $3 billion of luxury urban residences catering to seniors over the next five years.
Related said it sees demand from its customers looking for homes for themselves or their family members. The current oversupply situation won’t last, said Bryan Cho, executive vice president at Related.
“We see that changing dramatically over the next five years,” said Mr. Cho, adding that in certain cities, availability rates are low and existing inventory is dated.
Developers including Welltower Inc., Ventas Inc., Hines and Harrison Street Real Estate Capital have also invested in senior housing in recent years. Some favor it because senior housing is less tied to the ups and downs of the economic cycle than hotels, retail and most other types of commercial properties.
“It’s very much needs-driven demand. These tenants are not one to get up and relocate out of a property because of an economic downturn,” said Chuck Harry, chief of research & analytics at NIC.
Recently, there are signs that supply growth may be slowing. Construction starts totaled 2,349 units in the third quarter, which is around 6% of existing inventory. That was down from 6.5% in the second quarter, according to NIC.
“The fundamentals of the senior living sector will improve,” said Mizuho Securities analyst Richard Anderson. “But it might be a bit like watching paint dry.”