Senior Living in the 21st Century

Meanwhile, analysts agree that the Social Security program will run out of funding by 2034 or 2035⁵⁷ — just halfway into many Boomers’ retirement years.

Most retirees’ backup plans aren’t much better. From the Insured Retirement Institute, a recent survey of retirees found that “actions boomers plan to take if they run out of money during retirement are to downsize in order to get by on Social Security alone (58%) and/or attempt to return to work (37%).”⁵⁸

Relying on Social Security or returning to work may be wishful thinking — but what does “downsize” mean? The Boomer generation owns more than 50% of the nation’s net worth,⁵⁹ with the median Boomer-headed household having between $175k and $225k of net worth.⁶⁰ From the median to the 90th percentile, most of that wealth is split between two asset classes: retirement accounts and home equity.⁶¹

For most Baby Boomers, “downsizing” will mean selling homes and/or cashing out of retirement accounts, depending on their needs. Will that be enough to cover their expenses?

INTERGENERATIONAL WEALTH

Share of national wealth owned by each generation, by median cohort age.

Senior Housing: Current Capacity in the U.S.

According to a 2019 study by NORC at the University of Chicago, more than half of middle-income seniors will lack the financial resources to cover their medical and housing expenses in old age.⁶²

Most people below the median can look to Medicaid, and those above the 90th percentile have sufficient means for costly care — but some 14 million people in the middle will likely have unmet financial needs, costly health conditions, and a deteriorating quality of life.

Admittedly, 14 million is a conservative estimate. As the study’s authors put it, “Our ten-year model ended before the large cohort of seniors turns eighty-five, when rates of health conditions increase rapidly. Thus, the number of seniors needing additional care is likely to grow dramatically after 2029.”⁶³

THE VULNERABLE MIDDLE

Researchers found that more than half (54%) of middle-income seniors will not be able to afford the average medical and long-term care costs of retirement - even if they sell their homes. If they keep their homes and commit all other financial resources to retirement, less than a fifth will be able to afford the average costs.

They suggest a growing need for the private sector to step in and provide more affordable services to this “middle market,” those with insufficient funds who will nevertheless be unaided by Medicaid.

Until now, most private sector investment has been used for growing the highest-priced (and highest margin) senior care offerings. A 2018 National Investment Council study titled Investment in Seniors Housing & Care Properties found: 

In the U.S., there currently are approximately 23,500 investment-grade seniors housing and care properties containing 3 million units. For the purposes of this report, we use “investment grade” to define age-restricted properties with at least 25 units/beds that charge market rates for the housing and services offered.⁶⁴

The study shows that 42% of this capacity — about 1.3 of the 3 million units — occupy the highest-rent category, Nursing Care, even though this category is the least in demand for today’s market.

Overall patterns show that investment in senior housing has less to do with those most in need, and more to do with the pressure on private equity firms to acquire and develop high-growth real estate. The study explains: 

For many investors, the combined components of real estate, hospitality, and needs-driven services give seniors housing and care properties a unique resiliency, offering the benefits of real estate investment along with the [inelastic demand] characteristics of the healthcare field. This resiliency was evident during the real estate downturn of 2008-2009, when seniors housing and care properties outperformed other commercial real estate property types in terms of investment returns and rent growth.⁶⁵

Most of this growth pressure comes from the biggest investors in private equity: pension funds.

The NCREIF Property Index (NPI) is a leading U.S. quarterly time series composite total rate of return measure of investment performance (gross of fees) of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. ... All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors — the great majority being pension funds.⁶⁶

Historically, growth in senior care has been competitive enough to maintain investor focus on these high-margin properties: 

As of 4Q 2017, seniors housing properties had generated an annualized return of 10.4% since 4Q 2007. This compares to an annualized return of 6.1% for the entire NPI.⁶⁷

Due to these higher rates of return, a great irony has unfolded: in an attempt to build financial security for senior pensioners via real estate investment, private equity has optimized the senior housing market to collect high rents — pricing out most seniors, and making their pensions less efficacious at securing them in retirement.

SENIOR HOUSING UNITS BY CARE

SENIOR HOUSING UNITS BY COST

Adding to the problem, COVID-19 has now raised operating costs on senior care, which lowers margins but keeps prices elevated.⁶⁸  The tighter squeeze on capital means that investors and property managers are scrambling to lower operating costs.

In the context of COVID-19, the most popular plan for meeting middle-market demand is to buy distressed assets — underperforming nursing homes and assisted living facilities — and reduce their operating budgets by cutting staff, features, and benefits. Some firms hope to replace onsite skilled caregiving staff with telehealth services, while others are discussing reductions of food service and lifestyle amenities. 

Senior Housing News reports what a typical senior housing firm is doing to meet rising demand amid pandemic-related costs:

R.D. Merrill conducted an internal analysis of its full-service operational model, the components that are affordable and how they could be structured to meet middle-market demand. Wages and benefits account for 32% of revenue investments and 48% of total expenses, and 70% of full-time employee hours are in dietary and care positions.

[R.D. Merrill’s president] Pettit believes that tweaks to food service and dining departments — narrowing the range of options — can be a big part of providers’ middle-market strategy.

“We believe that our vision for serving middle income seniors is scalable but we have to think more creatively about what ‘full-service’ really means,” he said.⁶⁹

This strategy typifies the market response to rising costs: commoditization. It may yield a short-term competitive advantage, but it ultimately fails to supply seniors with the care they need. The following explanation appears in Independent for Life, an interdisciplinary study from the University of Texas:

Similar to the other standard real estate product types, the commoditization of senior housing helps lower the financial risk for investors, but has negative side effects. Many of these commoditized products are initially built by real estate developers, generally people who know how to build, but not manage, senior housing. Facilities are then sold or leased to operators, providing a possible disconnect between services required and the buildings delivered.However, the major problem is that there is a disconnect between the senior housing units and the suburban communities in which they are built. There is often no connection between the immediate community and the senior housing facility. This arrangement ignores the role that the surrounding community and its transportation system play in residents’ well-being.

If senior housing is isolated … a rich set of community supports can be lost. The community has been developed at a cost that has been amortized over many years, and these supports must then be re-created at significant costs to the facility, which results in the higher rents and fees of traditional senior housing.⁷⁰

In short, the very strategy being deployed to reduce costs for investors — commoditization — will increase them in the long run for seniors and their surrounding communities.

Alternative modes of care are gaining prominence, at least conversationally. A 2019 survey conducted by architectural firm Perkins Eastman found that industry professionals saw “smart home” technology, sharing economy apps (e.g. Uber/Lyft, Task Rabbit, grocery delivery), and telehealth as the top disruptors to the senior living industry, with some 80% of surveyed professionals citing these as “very” or “extremely” impactful.⁷¹ 

PROJECTED POPULATION WITH DEMENTIA

Population aging will drive the number of adults with cognitive impairment and dementia far higher in the next 15 years.

These disruptors belong to a market category called “aging in place,” in which aging persons remain in their homes throughout their later years. To avoid deadly falls, many will have to retrofit their homes, adding ramps, handrails, and other safety/mobility modifications.⁷² According to a report by Harvard’s Joint Center for Housing Studies, 

By 2035, 17 million older adult households will have at least one person with a mobility disability, for whom stairs, narrow corridors and doorways, and traditional bathroom layouts will pose challenges to safety and independence.⁷³ 

Many seniors opting to age in place will have to hire part- or full-time caregivers as disabilities set in, especially those suffering cognitive impairments.  The study goes on, 

The number of adults aged 65 and older with dementia may reach 6 million, with another 13.9 million having some form of cognitive impairment that does not meet the criteria for dementia.⁷⁴ 

Another alternative to traditional senior care communities is cooperative housing. As SeniorLiving.org explains, 

In senior cooperative housing, active 55 and older residents own a share of the community with an equal voice in how it’s run. The tax benefits of home ownership are there but without the hassle of home upkeep. This makes an ideal transition from long-time home ownership to a more maintenance-free life.⁷⁵

Senior Housing News expands, 

Co-op living also gives residents a stake in how a community is managed, similar to a traditional homeowners association. Each co-operative has an elected executive board and members have a vote in how buildings are managed and operated ... co-op models offer opportunities for residents to meet new friends, find new ways to volunteer and be active, and enrich their quality of life.⁷⁶

The costs of co-op living vary widely by location and community, ranging from 20% to 40% of the unit, which typically ranges from $100k to $225k according to SeniorLiving.org.⁷⁷ Overall, this model appears less costly than for-profit options, but includes less healthcare assistance, which must be supplemented by the individual.

Regardless of emerging alternative models, most industry professionals believe seniors’ housing needs will be met by existing private, for-profit operators. Since available investment-grade properties (supplying some 3 million units) do not meet projected demand (a figure the for-profit sector cannot agree upon, ranging from 10 to 40 million households), significant development is anticipated in the coming decade. Whether they will be affordable for the middle market is equally uncertain to investors, developers, designers, and retirees themselves.

In the Shoes of Seniors

How do modern-day seniors feel about aging? What do they want most out of their retirement years?

Many surveys and studies have been conducted to ascertain the preferences and plans of Boomer retirees, and the results reveal consistent themes surrounding relationships, health, and financial stability.

Pew Research Center reports, 

Of all the good things about getting old, the best by far, according to older adults, is being able to spend more time with family members. In response to an open-ended question, 28% of those ages 65 and older say that what they value most about being older is the chance to spend more time with family, and an additional 25% say that above all, they value time with their grandchildren.⁷⁸

This theme of togetherness, especially with loved ones, recurs in almost every survey on aging, across all ages and genders. The Pew data also says of those over 65, 

They’re about as happy as everyone else. And perhaps more importantly, the same factors that predict happiness among younger adults—good health, good friends and financial security—by and large predict happiness among older adults.⁷⁹

Maintaining good health, relationships, and finances is therefore the highest priority for most.

Those designing seniors’ housing and care facilities, as well as investors and policymakers, can serve seniors better by understanding their priorities — and how those priorities shift when situations change. As it turns out, the prospect of cognitive impairment has a strong influence on home preferences. 

In the same study, 14% said they’d move to a place that is staffed to provide health care plus help with daily activities if they needed help because of a physical disability. When asked where they would want to live if they needed help due to dementia, that number grew to 42%.⁸¹

LIFESTYLE STUDY RESULTS

This study focused on how respondents would prefer to handle lifestyle choices if they faced a physical or cognitive disability using  a 10-point scale (10 being highest) to rank their top lifestyle priorities if they found themselves disabled or needing assistance.⁸⁰

The negative side of their priority list was also revealing: 

When asked what worries them most if they were to need [long term assistance], the biggest worry by far was becoming a burden on family members. It was interesting to see that only 10% of respondents worried about not being able to stay in their community and only 11% worried about having to live in a nursing home.⁸²

Given the choice between burdening family members to remain in place or moving from their homes to receive memory-based care, it appears many prefer the latter.

At the same time, many seniors prefer to avoid sterile or unfamiliar settings as much as possible. HealthAffairs.org reports, 

Increasingly, people living in [senior care] communities have high rates of chronic illness, functional dependence, and medical complexity. In the context of this higher acuity, seniors generally have a desire to live and receive care in the least institutional and most homelike setting possible.⁸³

This preference makes institutional facilities a last resort for those whose acute care needs have grown beyond the scope of family support or begun to strain relationships.

The instinct to keep relationships strong may be protective as well as gratifying. Clinical research shows that cognitive health has a major social component. A report on Social and Emotional Aging published in the Annual Review of Psychology found that

Positive social networks may be protective against cognitive decline. Following more than 1,200 older adults who were tested over a three year period, they observed that those with strong and positive social networks were sixty percent less likely to show signs of dementia three years later. Older people who engage in volunteer activities that are either socially or mentally demanding also perform better on cognitive tasks.⁸⁴

DISABILITY SURVEY

How many seniors would move to health care facility for help with a disability?

The review goes on to cite multiple studies in which positive socialization predicted longer life expectancy, lower rates of heart disease, and better overall quality of life. These impacts are believed to be age-independent, but they are especially visible late in life as health risks increase.

Like relationships, outdoor activities and contact with nature are known to promote good health outcomes. A study published in the scientific journal Nature found a tight correlation between the amount of time spent outdoors and several positive behavioral and physical health markers: 

We show that people who made long visits to green spaces had lower rates of depression and high blood pressure, and those who visited more frequently had greater social cohesion. Higher levels of physical activity were linked to both duration and frequency of green space visits.⁸⁵

It may not be just the experiences and behaviors one engages in, but also their sense of meaning and purpose, that determines one’s health outcomes both physically and mentally. Recent research from UC San Diego published in The Journal of Clinical Psychiatry found that “the presence of meaning in life is associated with better physical and mental well-being, while the search for meaning in life may be associated with worse mental well-being and cognitive functioning.”⁸⁶ Similarly, a meta-analysis of 66 clinical studies found a consistent link between meaning in life and overall physical health markers.⁸⁷

When choosing how and where to retire, seniors have good reason to prioritize community relationships, home-like surroundings, meaningful activities, physical exercise, and proximity to nature. They also have good reason for concern when it comes to their single greatest worry about retirement: affording it.⁸⁸

The Retirement Equation

This is the tricky part — what are the unanticipated costs of retirement likely to be for the average retiree?

The most overlooked expense is Long Term Care (LTC), which includes “medical or non-medical care for people with disabilities or chronic illnesses, including in-home and in-facility care,”⁸⁹ according to the US Department of Health and Human Services. LTC can mean nursing homes or medical facilities for some retirees, or in-home visits from assisting professionals for others. Medicare pays for a very small subset of LTC needs that fall within certain bounds, but the majority of LTC needs and uses are not covered.⁹⁰ 

Unfortunately, according to a survey conducted by the Insured Retirement Institute, “More than four in 10 boomers erroneously believe Medicare will cover long-term care costs,”⁹¹ leaving many millions of seniors unprepared for this often necessary and exorbitant expense. A full 50% of survey respondents who didn’t financially plan for LTC thought it was included in Medicare.⁹²

Overall, the HHS finds that 69% of seniors will require some amount of Long Term Care during their retirement years, with the average recipient needing three years’ worth of sustained care.⁹³ Determining exact costs of LTC is more difficult, as it changes by state, type of care, and what year the costs will be incurred.⁹⁴

BOOMER EXPECTATIONS

More than four in 10 boomers erroneously believe Medicare will cover long-term care costs, leaving many millions of seniors unprepared for this often necessary and exorbitant expense.

U.S. OLDER POPULATION BY STATE

About 52 million Americans are age 65 or older, according to the Census Bureau’s 2018 population estimates. One quarter of these older Americans live in 10 states. These 10 states are also the most populous and include over half of the total U.S. population.

To project costs proportionally by state, we used 2018 US Census Bureau data on the age of residents to determine which states’ cost tables to use. Since 54% of U.S. seniors are concentrated in just 10 states, the cost tables for California, Florida, Texas, New York, Pennsylvania, Ohio, Illinois, Michigan, North Carolina, and Georgia provided the weighted averages, based on those states’ overall shares of the senior population. ⁹⁵

To establish a cost range, we calculated care expenses based on the most- and least-affordable forms of LTC available in each state. These range from hiring a home health aide (cheapest) to renting a private room at a nursing home (most expensive).

In 2019 dollars, the weighted average per-capita cost of three years of LTC ranges from $162,000 to $334,000. 

These figures are calculated per senior, not per household. Since the median Baby Boomer’s household net worth is between $175,000 and $225,000, then, for all but the very wealthy, LTC for one or both spouses would absorb their household’s entire net worth — before accounting for general living expenses.

But since LTC is more commonly needed later in life, most won’t be paying for it in 2019 dollars. Instead, they should figure costs in 2035 dollars, around the time they’ll actually need assistance or care facilities. By that time, inflation will have raised prices considerably, especially on medical services not covered by normal insurance.

In 2035, assuming an inflation rate of 8% (concurrent with the alternative inflation estimates offered by the three independent economists mentioned previously), the cost for three years of LTC will range from $515,000 to $1,061,000 per senior. Since 69% of seniors will need an average of 3 years of LTC each, and there are roughly 70 million U.S. Baby Boomers who will be seniors by 2035, then the total cost of the problem could be anywhere from $25 trillion to $51 trillion. To put those figures in perspective, the country’s entire GDP for 2018 was $20.5 trillion.

There’s no ignoring the writing on the wall: most retirees will have to downsize in order to afford the care they need. Even then, they’ll need more help. Simply cashing out of retirement accounts early won’t balance the books, which leaves just one final nest egg for most seniors — their homes.

FUTURE LTC COSTS

Housing Recession: Yet Another Wave

The good news is that seniors have plenty of home equity — about $7 trillion.⁹⁶

The bad news is that seniors now own close to 40% of the country’s home equity⁹⁷ — enough that if they sell their homes to meet rising retirement costs, it could devalue the entire housing market. This would mean even those with sufficient investments could see them shrink to insufficient levels before they managed to cash out.

Even before factoring for the rise of living/medical costs, generational housing turnover already has analysts concerned. Among those at Fannie Mae, there are warnings of a Boomer Homeowner Exodus: “Looking further out to 2026-2036, the cohorts aging into the 65+ age range are projected to shrink by between 13.1 million and 14.6 million homeowners, a loss at least 42 percent greater than registered during the most recent decade.”⁹⁸

Notably, their analysis is based only on historical homeowner attrition rates applied to the Boomer population and does not factor in any of the other novel impacts we’ve explored — long-term care costs, failing pension programs, or shrinking Social Security benefits. Once these pressures are accounted for, homeownership attrition rates may be significantly higher.

Barron’s predicts the wave of home sales to be more intense: “Between 2017 and 2027, 920,000 homes will be released into the market each year by people aged 60 or older ... By the decade between 2027 and 2037, the figure is projected to hit 1.17 million homes a year.”⁹⁹ The report goes on, “All told, Zillow estimates that more than 27% of currently owner-occupied homes, around 20 million properties, across the U.S. will go up for sale by 2037.”¹⁰⁰

MILLENIAL HOMEOWNERSHIP

Further compounding the issue, there aren’t enough willing home buyers in younger generations to purchase Boomer homes. A study conducted by the Urban Institute found millennial homeownership to be far behind previous generational trends. For most, this was a financial decision. Millennials surveyed said they weren’t homeowners because they couldn’t afford a down payment (53%) or qualify for a mortgage (33%), while nearly a quarter (23%) saw homeownership itself as too great a financial risk¹⁰¹ — likely informed by memories of the 2008 housing crash. With little financial wherewithal and even less trust in the housing market, younger homebuyers will be far fewer than older home-sellers.

From there, it’s Economics 101: a glut of supply without concurrent demand means an inevitable drop in home prices. As Fannie Mae’s analysts put it, “the exit of Boomer homeowners will occur on such a massive scale that it could alter the long-term demand-supply balance in ways that are negative for the home sales market and home prices.”¹⁰² That is, not just a V-shaped downturn, but an L-shaped revaluation of homes is on the way. The Washington Post calls it “essentially the next housing crash.”¹⁰³

The magnitude of such a crash in the housing sector and its knock-on effects in other sectors are hard to predict, but the 2008 recession is a telling case study. From mid-2006 to early 2009, the Case-Shiller Home Price Index (an empirical index of home prices in the U.S.) fell 37 points,¹⁰⁴ or roughly 20% — a seemingly small downturn, but enough to yield a decade of impacts to international banking rates, employment rates, and gross domestic product. Intuitively, then, the coming Boomer exodus could trigger another long-term global recession.