America's Senior Housing Crisis | Wall Street Week

We considered probably four different residents, and that was before COVID. And then we looked at Murano and loved Murano. That's Marilyn Bergstrom, an 87-year-old widow who has recently left her house in Seattle, Washington to take up residence in an upscale senior living development. My husband, he got lung cancer and passed away in a year. And then I stayed in the house for another year. And then I decided it was time for me to move on. Well, I had thought years ago I wanted to live in a senior living community before I had to. Bergstrom is on the leading edge of a coming explosion in people who will seek senior living accommodations. The number of Americans over age 80 is projected to surge over the next 25 years, from 13 million today to over 32 million by 2050. And within the growing population over 75, those with annual incomes over $100,000 are growing much faster than the rest, with the highest percentage of growth coming from those with incomes over $200,000. Demographics are definitely in our favor. I got into this business just over 30 years ago, and we talked about then this silver tsunami that was coming. Well, I'm happy to say that I'm actually seeing it happen now. You know, within the next five to 10 years, that aging population is actually going to be moving into senior living. Tana Gall is one of those addressing the growing demand for high-quality senior living. She's president of Merrill Gardens, which owns and operates retirement communities in 70 locations across the United States, including Murano, which Marilyn Bergstrom now calls home. And what her company provides goes well beyond just a place to live. We define senior living as a place for people to go enhance their lives once they're past the age of 62 and they're ready to downsize or they have some need that really keeps them from living in their own home and makes them want to move into senior living. So we provide help with activities of daily living. We provide meals, housekeeping, maintenance. Probably the most important and maybe overlooked is social interaction. People who live at home alone are lonely, and we know that socialization helps you live longer and certainly not just longer, but happier lives. Tai chi, yoga. All those amenities don't come cheap, particularly at the high end of what Merrill Gardens has to provide. But today there is a growing number of seniors like Bergstrom who can afford it. I'm paying about $7,500 a month. That includes my car, which I like to have as long as I can drive. I feel that it's a fair price for what you get. This is far better than any place I expected to live. When I first moved in, I just felt like I was in a fancy hotel every morning that I woke up. And Tana Gall says that as pleasant as it is for residents like Bergstrom, it should also be good business for Merrill Gardens. I would not say it's a high margin business. It is a middle margin business. Our margins have been a little more compressed of recent since the pandemic. The pandemic was really rough on our sector for sure. If your question had been to me, Tana, what keeps you up at night? I would have said getting enough great team members. There's a couple things that we're looking at. Number one, we are trying to attract more people into our business that don't even know we exist. So for example, we hire a lot of people from the hospitality business. It's very, very similar to running a hotel. We have also really broadened our scope in reaching out to colleges and universities. Robust demand that's about to explode. Clientele with the ability to pay high prices. A business with solid margins. All of it should make the world of senior living a truly good real estate investment. But as NCMAP Vision CEO Eric Morton says, there's one thing holding it back. Supply. His firm tracks senior housing inventory and demand. Senior housing is really facing a watershed moment as the baby boomers begin to turn 80. Senior housing construction has been outpaced by 80 plus growth since 2022. And that gap is only set to continue as the boomers grow by about 40% by the end of the decade. It's really on the supply side that the issue has manifested. So the pandemic brought inflation to construction costs, as well as a historic increase in interest rates. And the effect of that has been to make the cost of development basically out of reach for most markets. And so what's happened is the senior housing inventory growth has hit all-time lows right as demand is set to explode. I have been fortunate enough to watch our industry go through two very big cycles. As I mentioned, back in the mid-90s when assisted living hit Wall Street, nobody was public before, but a bunch of companies went public in the mid to late 90s. And they built a lot of assisted living. And then we had the dot-com bust and things slowed down again. And what was good from that is it took all those buildings that we built and filled them up. And so then the supply demand was in a nice balance for quite a few years. And then when the recession hit in 08 to 10, same thing happened. We had a lot of product on the market and people weren't moving in. So now as we come into a new economic climate, it is probably the lowest I've seen on construction starts. Maybe in my 30 years. So in some ways, that's a little bit distressing to me. But what I'm seeing happen is everybody's filling up. Our occupancies, I'd say, as an industry are back up to about where they were before the pandemic. Occupancy rates are back up. But now there's a risk things will go too far, that there will be a substantial shortage in available senior housing. At the current pace, we're on track for about a $275 billion shortfall in senior housing development. I still think a lot of the challenge is frankly just projects don't pencil. So if you think about what's happened there, you're looking at construction costs that have gone up by 25 or 30 percent. Debt that used to be three or four is now seven or eight. And so when you put those two together, your cost of development has gone up pretty substantially. At the same time, you're looking at what's happened to margins over that time. Well, occupancy has been down and the cost of labor has gone up. But if you dig deep and go down market by market, street corner by street corner, there are areas where occupancy is high, rates are high, and the construction costs, the equation pencils. And so we're really seeing people kind of sharpen their pencils and really go hunting for those areas that can work today. And the number of those areas that work are going to increase as demand explodes. But if investors are going to be in a position to move in to serve that exploding demand, there have to be enough projects in development now, just waiting for the capital and the go-ahead. Tana Gall at Merrill Gardens says she's ready to move as soon as it makes sense. It really kind of halted our development. And so, for example, I've got two pieces of land today that are entitled and ready to go, I can't financially make them work yet. And from an investor standpoint, there's a lot of people who want to get involved in the sector because they're seeing what's happening down the road. But right now, the cost of capital is just too much for us at this point. We're starting to see it come down, but it's not quite where we can make a project work yet. So we're always looking for pieces of land that make sense. To me, that's the kind of the scary scenario is that there's markets and segments of the market across the country that have, frankly, no excess capacity. And so the impact that could have on seniors and our entire society is pretty significant. So I think that, at the end of the day, is the thing that I worry the most about. All of which means those in the industry see an opportunity for investors to get into the senior living game now, in anticipation of that silver tsunami. At a time when the industry needs more capital, more debt financing to be able to go out and meet this need, we're seeing market participants that have become exhausted or maybe been beaten during the cycle. And so really, I think there's a call to action for the nation's banks, for the nation's asset allocators, LPs, pension funds, whoever they might be, to look at this not only as an opportunity to generate an incredible return, but also an opportunity to really help the industry meet the needs of society. And so I really am hopeful that that will happen. But to the extent that we have challenges there, that's something that I'm quite worried about. For all the challenges the senior housing industry faces, it also offers substantial rewards, financial and otherwise. When I jumped into senior living, I didn't think I would be in it for very long, to be honest. I thought, oh, I'll give this a try, see what it's about. Everybody told me, you know, the people are really nice in the industry. And I thought it would be like a six-month gig. And I literally woke up in August, and I've been doing it for 30 years. And here's why I love it. It matters. I get to make a difference in people's lives every day. And it's pretty significant. So for me, it's like working with the team members. If I treat my team members great, I know they treat my residents great. And simultaneously, it's a business. We make money doing it. So that's why I love it. That's why I think it's an industry that's going to be around a long, long time. And that, of course, is a good thing for Marilyn Bergstrom at Murano. I'd like everything just to stay as is. I mean, everything right now is just absolutely perfect. Kids, grandkids coming for dinner and spending time here. It's a place that people like to come to. In fact, even without being invited, they just will call up and say, oh, can I come over? And that's a really good feeling. It's like being in your own home.