Can aging boomers rescue the ailing commercial real-estate industry? This $2 billion fund is betting on it.

By Joy Wiltermuth

The population of baby boomers hitting 80 years of age and older is expected to double by 2040

Age matters in U.S. commercial real estate more than ever.

The pandemic put older office buildings at risk of becoming obsolete, while higher interest rates have made financing tougher to come by. The potential fallout at banks has regulators on high alert.

But aging, and changes in age brackets, also can bolster parts of commercial real estate - especially as a wave of baby boomers hit the typical age group for senior housing.

"There's going to be a lot of pain that's going to happen in the near term as banks try to deal with buildings that don't have occupancy today, or in the future, that will cover operating expenses," said Christopher Merrill, co-founder, chairman and CEO of Harrison Street, speaking of the office sector specifically.

Chicago-based Harrison Street, which manages $56 billion in assets for institutional investors like pension and sovereign-wealth funds, has been doing things a bit differently.

Instead of hunkering down in core categories like offices, hotels, multifamily and retail, Harrison Street for the past two decades has focused on demographic-driven properties - a niche that includes senior and student housing, but also life sciences and storage.

"Instead of headwinds, we are seeing tailwinds," Merrill told MarketWatch. He pointed to robust funding for drug development that aims to help people live longer and healthier lives, and also how the next five years will see a wave of baby boomers hit the early-80s age range typical for entry into senior housing. "There's an issue of where are we going to house people."

Read: Zero. That's how much 28% of the country has saved for retirement

Despite a challenging backdrop for fundraising, Harrison Street recently raised $2 billion for a new opportunistic fund that could grow to $4 billion, according to PERE. The business publication said Harrison Street has targeted an internal rate of return of at least 15% for its opportunistic strategy.

Merrill declined to discuss fundraising for this article. But he expects significant buying opportunities in senior housing and other demographic-driven properties as more owner-operators face debt issues or liquidity needs over the next few years.

Build baby build

Private, for-profit investors own about half of the U.S. senior-housing stock and almost 70% of care facilities, while publicly traded real-estate investment trusts own a smaller share at about 11.6% and 6.5%, respectively, according to the National Investment Center for Seniors Housing and Care, a nonprofit focused on research, analytics and outreach.

Welltower Inc. (WELL) and Ventas Inc. (VTR) are among the largest U.S. REITs active in the senior-housing and healthcare sector.

"We expect the 80-plus demographic will grow by more than a third by 2030 to about 19 million, and nearly double by 2040 to 26 million," said Caroline Clapp, senior principal at NIC, the nonprofit.

"Just like everyone else in real estate, it's been difficult to get new construction going," Clapp said, referring to pandemic-era supply-chain disruptions and labor shortages that have weighed on new inventory in recent years. "We are very much in a supply shortage."

NIC anticipates a need of about 800,000 additional units of inventory to serve seniors by 2030. The group's 2019 investment guide has the value of investment-grade U.S. senior housing at around $475 billion, about an eighth of Nareit's estimate for the $3.8 trillion multifamily market.

Yet a big question remains whether baby boomers, many of them homeowners benefiting from skyrocketing home-price appreciation in the wake of the pandemic, will opt for senior housing.

Clapp attributed the uncertainty to a baby-boomer attitude where many aging seniors want to stay at home for as long as possible - even though a minimum of four hours of care each day remains financially out of reach for all but 14% of people aged 75 and older and living alone. "It's a dual burden of care and housing," Clapp said.

That has senior-housing advocates focused on the need for more housing supply with a range of amenities, including having scaled-back dining services to help with affordability.

See: 'We don't have enough homes to meet our aging needs': The ideal home for aging in place might not even exist

"Our country's housing stock is very much out of whack with people's needs," said Linda Couch, senior vice president of policy and advocacy at LeadingAge, an association of nonprofit providers of aging services.

The Department of Housing and Urban Development estimated that as of 2021, there were 2.35 million older-adult households in its "worst-case housing needs" category, which consists of very-low-income renters (making 50% or less of area median income) that spend more than half of their income on shelter.

"There is a severe lack of affordable housing for older adults with low incomes; this is the reason older adults are now the fastest-growing age group of people experiencing homelessness," Couch said.

The supply-demand imbalance can result in seniors trying to move to markets that priced them out years ago, she noted, or end up with them being stuck on wait lists for years, putting some at risk of becoming homeless.

"The bright spot is that we know the solution: provide more housing assistance and build more affordable housing," Couch said. "Without implementing more solutions, we are guaranteeing worse problems."

-Joy Wiltermuth

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03-19-24 0730ET

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