MICHAEL BERNE, managing director and head of the seniors housing capital markets team at Chicago-based Jones Lange LaSalle , sees one key thing in seniors housing: Demand. Today, there are nearly 37 million people 65 or older in the United States, according to the Census. Fueled by the aging B aby Boomer s, that number will reach 71.5 million by 2026. “The demographics of the aging population bode well for existing and new developments that focus on seniors,” Berne says.

Unfortunately, there's a major hurdle facing owners and managers who'd like to capitalize on that demand—the economy. The near-frozen capital markets make it incredibly difficult for reputable owners to build, buy, and renovate age-restricted properties. What's more, the economy is making it hard for current owners to maintain their occupancies. The ultimate losers are those 76 million seniors needing housing over the next two decades. If today's markets don't improve, the need for good, affordable seniors housing may reach even higher than it's already projected to be.

Future Demand

Despite all of the hype about Baby Boomers and their housing needs, Michael Schonbrun , president and CEO of Balfour Senior Living , a Louisville, Colo.-based developer and operator of seniors housing and skilled nursing facilities, says the crest of the movement still hasn't arrived yet. “People born in 1946 are 63 or 64 years old,” he says. “They don't start moving into retirement communities until their mid-70s.”

Between now and 2020, the 55-plus base will increase by 20 million in addition to what exists. “How many additional developments will you need?” Berne asks. “You may need hundreds and hundreds.”

Of the 5.18 million renter households with “worst case” housing needs (renters without housing assistance, paying more than half their income toward housing or living in severely substandard housing) in 2003, 1.13 million were headed by someone age 62 or older, according to the U.S. Department of Housing and Urban Development. And that situation could grow worse.

“There could be nine people waiting for every single unit,” says Michelle Norris , senior vice president and chief development officer at Columbus, Ohio-based National Church Residences , an owner and builder of seniors' housing. “The folks with the most need for health care and low-income housing are the ones with an undersupply.”

Financing Burdens

The economy is only making matters worse. In fact, if you're building new seniors housing, there's virtually no capital. “[Financing] doesn't exist,” Schonbrun says. “The only debt is through HUD programs which are swamped.”

But Berne thinks that market is improving slowly. “It's a little bit easier [now] to get financing for seniors products as opposed to non-seniors product,” he says. “It appears to be easier, not from national banks, but from local and regional banks that have good customer relationships.”

Outside of the Federal Housing Administration 's LEAN Section 232 program , there aren't a lot of options out there for affordable seniors housing. “We have some tired nursing homes that will need upgrades and renovations,” says Laura Saull-Smith , a senior vice president in the Washington, D.C., office of Love Funding Corp . “There's no conventional financing available, unless an owner has a really good local bank that's still working.”

Another issue facing the seniors sector is investor perception. Much like the student sector, the seniors sector is especially fragmented, with a lot of mom-and-pop owners. This makes it especially difficult for sophisticated institutional equity to feel comfortable spending money.

“The challenge with seniors housing is that it's still the newest of the categories,” Schonbrun says. “There are still a lot of blenders and investors who don't quite understand it. The seniors industry is more transparent, but it's not as transparent as it needs to be. There's a certain wariness about understanding this business.”

When it comes to equity, the buzzword in senior is much like it is in other multifamily sectors. “The only real capital that's out there is money to buy distressed assets from other senior living companies,” Schonbrun says. “It needs to be signifi- cantly marked down to be attractive to any equity groups that we deal with.”

Economic Doldrums

It's hard to make the argument that more seniors housing is needed when occupancies are slumping in some market-rate segments. Not surprisingly, the one type of seniors housing hurting the most right now is the independent living sector. “These are people who don't have to leave their long-standing homes or recently-acquired condos,” Schonbrun says. “They are moving because of lifestyle decisions.”

Right now, they don't want to move. Schonbrun says his independent living occupancies are down 5 percent. Saull-Smith says occupancy is in the 93 percent range and that cap rates are up at least 50 basis points (bps) in that sector, reaching 8.5 percent or higher. “Independent is riskiest right now because you have people wanting to move into independent living, but they need to sell a house,” she adds.

Even those in assisted living, who may need to move into seniors housing, aren't necessarily moving like they were in the past. Assisted living cap rates have gone up 75 bps to 80 bps, putting them between 9 percent and 9.75 percent, according to Saull-Smith. “Assisted living is another sector where some folks are staying with their kids,” she says.

Memory care is another situation. Cap rates for that sector moved from 10 percent to 10.5 percent, according to Saull-Smith, and skilled nursing has occupancy levels around 93 percent. “When you get into dementia, it's too dangerous to stay at home,” she says. “Skilled nursing is a different animal. Skilled nursing is more recessionproof than any other asset.”