Senior Housing Development Booming In D.C. Area, But Demand Hasn't Kept Up

The senior housing market has been one of the fastest-growing sectors in D.C. real estate, with developers bringing thousands of new units to the area hoping to capitalize on a demand bump from baby boomers.

But recent market data shows demand hasn't kept up with supply, leading to a decrease in occupancy levels. But two of the most active developers, who will speak Jan. 30 at Bisnow's Greater D.C. Senior Housing Summit, say they remain bullish on the D.C. market and are continuing to move forward with new projects. 

The occupancy rate for D.C.-area senior housing properties was 87.4% in Q3, down from 88.5% one year earlier and well below the peak of 93.5% in Q1 2016, according to the National Investment Center for Seniors Housing & Care, or NIC. 

"The downward trend in the occupancy rate in D.C. stems from the inventory growth which has exceeded net demand," NIC Chief Economist Beth Mace said. "Demand has not kept up."

Since the start of 2016, developers have completed 26 senior housing projects totaling 3,362 units in the D.C. area, according to NIC. Another 18 developments are currently under construction that will add 2,069 units, and more are being planned that could grow the pipeline in future years. 

"It's fair to say that when projects were underwritten, it's likely they were underwritten to occupancy rates that are higher than what currently exists in the market," Mace said. "They'll either have to modify their business plans to adjust to that, or it's going to take them longer to lease up than what was in their business plans."

One of the most active senior housing developers in the region, Erickson Living has existing communities in Silver Spring, Ashburn and Springfield, and it has four future projects planned that would add roughly 4,000 units to its footprint, Erickson Vice President Scott Gensler said.

Erickson's future pipeline includes an expansion of its Loudoun County community, new projects in Fairfax County and Howard County, and a major development on the Marriott International campus in Bethesda.

Erickson acquired the 34-acre campus off Rock Spring Road in January 2019, and Gensler said it is still in the early planning stages for what will be a long-term project. It can't begin construction until after Marriott departs the property for its new Downtown Bethesda headquarters in 2022. 

"We're very confident there's enough demand," Gensler said. "These projects will be built over time. We're not dropping 4,000 units tomorrow, but we're very confident there is growing demand in the D.C. Metro area and that the sites we have picked are well-diversified and will complement each other."

Gensler said he has seen an increase in the number of competing senior housing developers moving forward with projects in the D.C. region, but part of his confidence in the market comes from an expected surge in demand from baby boomers reaching retirement age.  

"I do think there has been more development and more projects, but I don't think it's saturated by any means because the demographic growth curve is also coming," Gensler said. 

Silverstone Senior Living also has a large pipeline of senior housing projects coming to the D.C. market. The developer has one existing community in Prince William County, and it recently began construction on three new projects: a 163-unit community in Alexandria's Potomac Yard, a 154-unit development in Fairfax and a 146-unit project in Rockville. 

"It has proven to be a market that is in need of senior housing," Silverstone President Chris Porter said. "A lot of people are doing the same thing that we're doing, but we've been very fortunate to get these three projects underway and started, and hopefully we'll have more in the pipeline very soon."

Porter said Silverstone's confidence also stems from the aging of the baby boomer generation, and he thinks that demographic trend will provide enough demand for the growing pipeline of projects. 

"I don't think the market is overly crowded," he said. "When we first started looking at D.C., there was not a lot of new products and new offerings for seniors to meet the demand that was coming up. What we've seen is there is definitely the demand coming."

Demographic data shows there will be a growth in the market for potential senior housing residents. The U.S. population of people age 75 and above is expected to grow from 22.6 million last year to 28.6 million in 2025 and to 34.5 million by 2030, according to NIC. 

That growing population presents a strong opportunity for developers, but they still need seniors to want to live in senior housing communities and be able to afford them, two issues that create some potential headwinds for the industry. 

New innovations in "aging-in-place" technologies make it easier for seniors to remain at home and could cut into the demand for senior housing, The Wall Street Journal reported in October. The companies creating these technologies were expected to raise about $1B last year, double the amount investors put into the sector three years prior, according to the Journal, which cited statistics from venture capital firm 4Gen Ventures. 

Gensler said Erickson's sales representatives do not see a significant trend of people deciding against senior housing because of new technology becoming available to them.

"Senior housing is more than housing, it's housing and services and it creates a social network for them," Gensler said. "Tech may make them feel comfortable staying in their household a little longer, but I don't think it'll replace the product."

Research has shown seniors are staying at home longer. The average age people enter senior housing has risen to about 85, compared to 82 a decade ago, the Wall Street Journal reported, citing Green Street Advisors. 

The oldest baby boomers, those born in 1946, won't reach age 85 until 2031, so the peak of the baby boomer movement into senior housing could be years away, but it is still expected to grow significantly. The population of 85-plus Americans is expected to nearly double, from 6.6 million last year to 12.3 million by 2036, according to NIC. 

Seniors also need to be able to afford the type of housing that is being developed in order to create enough demand to support the market.

The average annual cost of independent living facilities and medical out-of-pocket costs is about $45K, according to NIC. For assisted living, that number rises to $60K. The middle-income cohort of seniors, defined as between the 41st and 80th percentile of the income spectrum, could have trouble affording those living options.

Including their home equity, 71% of middle-income seniors 75 and older have enough money to live in independent living facilities, and 46% of them can afford assisted living facilities. 

This middle-income segment is expected to grow from 8 million seniors in 2014 to 14.4 million by 2029, according to NIC. Mace said NIC hopes to shine a light on the "urgent and important topic" of senior housing affordability. 

"We need to collectively figure out a solution for this, because we still have a number of years until that big surge of seniors occurs, but it is an issue today for those who are seniors," she said. "It's not just a public policy solution, it has to be a private sector solution as well."

A growing number of developers have begun to pursue affordable senior housing projects in D.C. Dantes Partners and Gilbane Development Co. broke ground in November on a 152-unit affordable assisted living facility on Southern Avenue in Ward 8. Plans were filed last year for a 68-unit senior affordable housing project in Congress Heights and a 155-unit affordable assisted living community in Deanwood. 

Porter said affordability has become a larger discussion in the senior housing industry in recent years. 

"As you see the senior population continue to explode, especially with the baby boomers coming, I do think affordability is going to become an issue in the market that needs to get addressed," Porter said. "It's something the industry is cognizant of."

Gensler said Erickson tries to serve the middle-income segment with its product by offering a different type of payment model than other senior housing providers. Rather than pay a monthly rent, he said Erickson residents pay an upfront entrance fee, which can range from $200K to $700K, and then they pay a monthly fee for services.

He said this works better for many seniors who have large amounts of equity invested in their homes that they can sell and then have a smaller monthly obligation than if the entire cost were paid in monthly rent. 

"Affordability has always been a concern and top of mind at Erickson, as we try to serve that mid-market," Gensler said. "It's something we're always watching, and we're looking at our product to see if there's anything we can do to make it more efficient and affordable."