Lenders seem happy to provide money to build housing for America’s youngest senior citizens—the baby boomers.
They offer loans to build new active adult properties with similar terms to the loans they provide for conventional apartment communities. Active adult communities are a relatively new kind of housing for older adults, but banks have not made them subject to the higher rates charged to other types of seniors housing.
New Focus on Active Adult Properties
Investors have spent years tracking the baby boom generation looking to see when they might be old enough to move into seniors housing. As of 2021, the oldest baby boomers are turning 75, and the youngest are just 57. But the typical age at independent living communities for seniors is still much older: 82 or 83, experts say.
“There is a real need for housing options—more options than we have,” says Jennifer Molinsky, senior research associate at Harvard University’s Joint Center for Housing Studies. Between 2012 and 2017, the number of heads of household 65 or older jumped from 27 million to 31 million, according to the Joint Center. The number of people passing their 65th birthday has been especially large in recent years as the baby boom generation gets older, says Molinsky.
Nearly a decade ago, a few leading developers began to focus on “active adult” communities aimed at these younger seniors.
“They really want community, without paying for things they don’t need, like two meals a day,” says Mark Myers, managing director of investment sales for Walker & Dunlop. “These seniors are also a long way from needing housing with health services. They are not sick, and they can probably beat you at tennis.”
Greystar Real Estate Partners built thousands of units of active adult housing through its Overture and Everleigh active adult brands. Other active adult developers like Calamar have succeeded in less expensive secondary markets.
“Active adult would appear to be a living situation that baby boomers might be attracted to,” says Beth Burnham Mace, chief economist for the National Investment Center for Seniors Housing & Care (NIC). “I’ve heard it called ‘baby boomer housing.’”
NIC does not yet keep data like occupancy rates and the amount of new construction for active adult properties, as it does for independent living and assisted living properties—though it may begin soon, says Mace.
However, lenders have noticed that active adult communities performed well—even during the coronavirus pandemic. They lease up slowly, like independent living properties, but the residents stay much longer—five to seven years on average—compared with the residents at other seniors housing, where stays average as little as two years, according to Austin Sacco, first vice president and co-production lead for CBRE’s National Senior Housing Debt & Structured Finance Practice, working in the firm’s Houston office.
“This age demographic was not as significantly impacted by the pandemic, unlike the elderly, so development financing remains readily available for the active adult product,” says Allison Holland, managing director for JLL Capital Markets, working in the firm’s Dallas office.
Competitive Interest Rates for Active Adult
Construction lenders are increasingly eager to finance these new developments.
“The most notable change over the last few years is the increase in the number of lenders that will finance this product type … compared to the lenders that only finance conventional multi-housing or seniors housing where services are being offered,” says Holland.
Banks are still the most important lenders for developers with plans to build new active adult or independent living properties. They currently offer interest rates that float 275 to 350 basis points over the relevant London Inter Bank Offered Rate (LIBOR), according to CBRE. Those spreads have also gotten less inviting since the pandemic struck.
“We have seen an increase in spreads,” says Sacco. “We had seen lower interest rate spreads than this … often in the 200-basis point range.”
However, banks consistently offer interest rates to active adult projects that are comparable to the rates they offer to regular multifamily projects—and much lower than the rates offered to independent living projects. “There really is no difference in terms or structure for active adult when compared to other market-rate apartment projects,” says Holland.
Independent living properties tend to have higher interest rates. “Due to the operational risk involved in independent and assisted living communities, loan terms are typically more conservative than multifamily,” Holland adds. “On average, interest rates for seniors housing are 40 to 50 basis points higher than a multi-housing project.”
Since the pandemic, banks have cut back on the size of the loans they offer to apartment projects in general, including active adult projects. “The credit environments have been disjointed,” says CBRE’s Sacco.
Banks now provide non-recourse construction loans that cover 50% to 55% of the cost of development, according to Sacco. To get larger loans from a bank, covering 60% to 65% of the cost of development, borrowers will have to guarantee at least one-quarter to half of the loan amount.
Seniors housing developers also can get construction loans from debt funds that regularly cover 65% or more of the cost of development with no loan guarantee from the borrower—in exchange for a higher interest rate spread.
“Debt funds typically need more yield than the banks,” says Sacco. Interest rates typically float 350 to 475 basis points over LIBOR, depending on the borrower and the property.
Debt funds also offer mezzanine loans that can be paired will senior financing to provide that higher leverage. “There is a lot more capital available today (compared with two years ago) in the form of mezzanine or subordinate debt that is placed behind a senior loan,” says JLL’s Holland.