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Tech Diffusion, Longevity, The Future of Energy and Investing for a Multipolar World are four key themes the Morgan Stanley Research team believes will shape industries, define investment decisions and transform economies. Lauren Hochfelder shares her thoughts on how longevity impacts our housing needs. "
With so much uncertainty in markets and the political realm, one thing we can be relatively sure about is that people are getting older. We can forecast with considerable confidence approximately how many 80+ year olds there will be over the next decade, and we know how much wealth they currently control.
As people age, their real estate needs evolve. Whether it’s millennials who need more space, or baby boomers who seek housing with care options, aging and longevity significantly influence the composition of demand for real estate.
Real estate serves as the foundational infrastructure of our lives. We might begin in student housing and then move to an apartment in the city. Later in life, we may move to a house in the suburbs and eventually consider senior housing. Aging impacts every type of real estate, and it reflects our changing needs throughout our lives. Thus, as investors, our understanding of demographic shifts is critical for projecting where supply/demand imbalances will exist in the future.
Senior Housing: Growing Demand Amid Aging Populations and Rising Longevity
The confluence of an aging population, significant wealth concentration and increasing longevity gives us a high conviction in Senior Housing. As the first wave of Baby Boomers turns 80, this year marks the start of the “silver tsunami.” The 80+ population is projected to grow nearly 5% per annum over the next five years, while the overall population is projected to remain relatively flat according to Oxford Economics.
Beyond the sheer number of potential tenants, we see stronger affordability in senior housing relative to some other residential segments as Boomers currently control more than half the wealth in the US, having benefited from significant long-term home price appreciation and equity market participation. In contrast to most other renters, who pay rent with wages, residents in senior housing typically use their savings, which is more quantifiable in the present.
Senior housing is more than just infrastructure; it fosters social connections among its residents. It also efficiently delivers care, allowing residents to age in place as they transition from independent living to assisted living… Thus, the growth of senior housing continues to redefine what it means to live longer and enhances the quality of life as we age."
Increasing longevity and a growing focus on the quality of life as people age also favors senior housing, which addresses many of the social needs of an aging population. The amenitization, activities and programming at senior housing facilities highlight that senior housing is more than just infrastructure; it fosters social connections among its residents. It also efficiently delivers care, allowing residents to age in place as they transition from independent living to assisted living, and in some cases, memory care. Thus, the growth of senior housing continues to redefine what it means to live longer and enhances the quality of life as we age.
How Investors Can Capitalize on This Trend
Beyond the demand tailwinds of senior housing, we see attractive dynamics around supply and entry point.
Specifically, new construction of senior housing is down 60% from pre-COVID levels and construction costs remain elevated, which should constrain new supply going forward. Keeping supply in check enables rental growth and asset value appreciation.
Plus, while equity markets and other asset classes have reached all-time highs, real estate valuations are still down on a cyclical basis, presenting an attractive entry point to acquire properties. Real estate yields are above historical averages and assets can be acquired at prices below replacement cost, presenting opportunities for strong absolute and relative value.
Longevity is an important investment theme across categories. Senior housing and real estate more broadly offer investors an attractive way to capitalize on enduring demographic drivers of demand, while enjoying durable income, the benefits of substantial inflation hedging, and low-correlated diversification.
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