Even though there are many interesting economic developments to talk about, we’re going to focus on an oldie, but a goodie … senior housing.
National Real Estate Investor just released their latest Seniors Housing Market Study and the headline hints that opportunity in the niche might be … growing old …
“High construction levels are tempering some of the enthusiasm in the seniors housing sector.”
Although cautionary, it’s hardly doom and gloom compared to this cheery report from Attom Data Solutions …
Or this one …
Or this one …
BUT, as we’re fond of pointing out, the flip-side of problems are opportunities.
And because real estate is NOT an asset class any more than “Earth” is an asset class, there are lots of niches, sub-niches, and micro-trends to dig into to find deals.
Besides, every time some casual observer scans a scary headline and walks away, it leaves even more opportunity unclaimed for those willing to look a little closer.
So let’s see what we can glean from these articles …
First, the “underwater” report illustrates the point that real estate can’t be an asset class because even a sector as broad as “housing” behaves very differently in different places …
“… the gap between home equity haves and have-nots persists because home price appreciation is certainly not uniform across local markets or even within local markets.”
As long as this is true, there will always be “haves” and “have-nots.” We’re not sure about you, but we’d prefer to be “haves.” So that means picking the RIGHT markets.
Of course, “markets” aren’t just geographic.
A market can be a product type … single-family housing, multi-family, mobile homes, student housing, senior housing, medical, office, retail, resort, and on and on.
A market can also be a price-point. “Low-income” is different than “work-force,” which is different than “executive,” which is different than “luxury.”
Consider this quote from the “appreciation” report …
“Price-per-square foot appreciation accelerates for homes selling above $1 million.”
You get the idea. As you continue to parse real estate into geographic, demographic, and economic niches, sub-niches and localities, you can uncover hidden opportunity.
This kind of analysis is the “work smarter, not harder” alternative to simply looking at hundreds of properties along with all the other deal-hunters.
So with that backdrop, let’s go back to our lead headline about what’s happening in seniors housing …
“Seniors housing has carved out a larger place in investors’ commercial real estate portfolios due to the compelling demographics and a track record as a steady performer in both up and down market cycles.”
“… survey indicates a note of caution creeping in because of how much new supply is coming into the market.”
First, “hint of caution” isn’t “OMG, the sky is falling” … so that’s good.
We’ll just hit one more quote, then look at how to go sub-niche as a way to mitigate the potential negative consequences of “too much supply.”
“…respondents in this year’s survey remain confident in seniors housing’s stable fundamentals. A majority are optimistic that both occupancies and rents will continue to increase …”
So clearly, there’s a LOT to like about the senior housing space.
Of course, it’s this very bullishness which attracts new development and increased supply.
HOWEVER, there’s an angle to consider … and the hint is that this article is written to, and about, commercial … largely institutional … investors.
To them, senior housing means big buildings … like those featured in this report from the American Seniors Housing Association.
And remember, when big institutional money is looking for yield, they need big institutional properties to buy or build.
But as our good friend Gene Guarino tells us, there’s a sub-niche of the senior housing niche that’s too small for the big players, but plenty big for Main Street real estate investors …
Residential assisted living homes.
RALs are where you take an existing McMansion in a residential neighborhood, make some modifications, bring in a specialized manager, and house a small group (8-16) of seniors who need assistance with their daily care.
But unlike a regular boarding house, these things cash-flow like CRAZY.
We won’t get into the mechanics of all that now. You can learn more here.
Our point is this is RALs are a sub-niche where you can ride a demographic wave (boomers’ parents … and eventually boomers themselves), an economic niche (million-dollar plus homes), a hot niche (seniors housing, and especially assisted living) …
… and avoid the challenge of excessive inventory created by big institutional money.
Think about it …
There’s not yet a practical way for institutional money to come in and build large supplies of residential assisted living facilities. They can only build “big box” facilities.
If and when they overbuild, it will mean the big box facilities will be forced to lower prices to attract residents from each other.
BUT, the big box operator has a BIG, all-or-nothing facility, meaning it can’t easily reduce room count to match demand. They either own and operate the entire big building or they don’t. There’s no in between.
So over-supply means they’ll need to cut SERVICES in an attempt to preserve profitability.
Contrast this to a RESIDENTIAL operator …
Let’s say you have six of these houses in an area where the big boxes overbuild.
Will YOU feel the price pressure? Sure. At least a little bit.
BUT … remember, the senior resident who ends up living in a big box is often a different customer than the one in a residential assisted living home.
Many will pay a premium to live in a home rather than an institution.
So right out of the gate, your sub-niche of the senior demographic is arguably less price-sensitive, and your residential home is a very different value proposition.
But let’s say you do get squeezed and lose a few residents. If you can’t replace them with profitable residents, you can always sell one of your six homes … into the single-family home market.
After all, it’s not like you’ve got a 125-bed single-purpose property. In other words, you have a Plan B exit strategy that feeds into a different niche …. home-owners.
It’s MUCH easier for you to navigate the ramifications of an over-build … so you can ride the hot wave with less risk.
Even better, if the big box operators’ profit margins get squeezed, don’t be surprised if they take notice of your high profit margins and make you an offer.
We could go on, but you get the idea. There are always niches and sub-niches when you’re willing to dig a little deeper.
So when you read headlines about macro-trends, keep in mind opportunity is often micro … and often requires more thought.
In this case, the cautionary headline about over-building serves as an example of how to ride a macro-trend, while avoiding dangers created when big money overcrowds a space.
Until next time … good investing!
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