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Building For Boomers May Yield Oversupply

Real estate developers are betting big on U.S. housing for the elderly, preparing for a surge in demand as the population of senior citizens almost doubles in the next 35 years. They may be building too fast.

A jump in supply is forecast to cut growth in senior-housing net operating income from 3.3% this year to 1.8% in 2015 and 1.4% in 2016, according to Green Street Advisors, a real estate research firm. The increase may hurt health care real estate investment trusts (REITs) and companies including Brookdale Senior Living (BKD) of Brentwood, Tenn., which is buying competitor Emeritus (ESC) for about $1.4 billion to become the biggest owner of senior properties, Green Street says.

"Increased supply is always worrisome in any type of commercial real estate," said Jim Sullivan, a managing director at Newport Beach, Calif.-based Green Street. "In senior housing, new construction has ramped up considerably over the last two years.

Health care REITs, which soared to records early last year, have been the worst-performing part of the property-trust market in the past 12 months. The U.S. had 526,144 senior-housing units in the 31 largest markets in the first quarter, up 1.4% from a year earlier, and an additional 16,181 units are under construction, according to the National Investment Center for the Seniors Housing & Care Industry, a trade group based in Annapolis, Md.

Stock Decline

The Bloomberg health care REIT index has fallen 18% in the past 12 months, compared with a 4.7% decline for the broader Bloomberg REIT index. The companies, which were trading at large premiums to their net asset values, have been hurt over concern about a narrowing of the spread between their capital costs and property prices, said Ian Goltra, a money manager at Forward Management in San Francisco.

Building and owning housing for the elderly have become more popular as baby boomers age. The population of people 65 and older is projected to surge to 83.7 million in 2050 from 43.1 million in 2012, the U.S. Census Bureau said this month. Baby boomers — those born between mid-1946 and mid-1964 — began turning age 65 in 2011.

Housing for the elderly varies greatly. Independent-living communities serve those who need little assistance with daily living, and sometimes include meals and activities, Brookdale's website shows. At assisted-living properties, residents usually receive help with bathing, dressing, transportation and medication management, according to the Assisted Living Federation of America, a senior-housing trade group based in Alexandria, Va.

Walking Path

Some properties have a mix of services.

One example is the Hallmark, a high-rise on Chicago's lakefront north of downtown that offers independent- and assisted-living options. The property, operated by Brookdale, has transportation services, meals, a walking path, housekeeping and an exercise room.

Among the largest senior-housing companies are Chicago-based Ventas (VTR), which owns 713 communities; Toledo, Ohio-based Health Care REIT (HCN), with 711 properties; Long Beach, Calif.-based HCP (HCP), with 444; and Brookdale, with 555. In February, Brookdale agreed to buy Seattle-based Emeritus.

"There's been a little bit of an uptick — we're mindful of that," said Brookdale Chief Executive Officer T. Andrew Smith when asked about supply at a Barclays conference in March.

"You have to go down and look at what's happening in each local market," he said. "We just don't see that much. It's not to say that there is none, but we don't see that much truly, directly, adversely new competition.

Houston's Hot

Houston is one area where the senior-housing surge is particularly striking.

The 1,591 units under construction in the city is the highest since at least late 2005, according to the National Investment Center. Houston has a fast-growing population and is a relatively easy market for development, said Hessam Nadji, chief strategy officer at Calabasas, Calif.-based Marcus & Millichap Real Estate Investment Services.

Across the U.S., peak demand for senior housing is 15 to 20 years away, according to Jacob Gehl, managing director and founding partner of Blueprint Healthcare Real Estate Advisors, a brokerage and advisory firm in Chicago.

The average person entering senior housing is over 80, Green Street said in an April report. The estimated number of people age 80 to 84 was 5.8 million in 2012 and the count is projected to climb to 13.5 million by 2040, the Census Bureau said.

'Inexorably Increasing'

Health care real estate executives say that concerns about an oversupply of senior housing are overblown. Large REITs such as Ventas are better able to withstand issues in certain markets and lines of business because of their size and geographic diversity.

"Demand is inexorably increasing," said Debra Cafaro, Ventas' chairman and chief executive officer. "From a long-term standpoint, it's a great asset class because the demand is there.

Ventas has five senior-housing communities in the Houston area that generate annualized net operating income of $7.7 million.

"There is new construction, but we feel OK about it," Cafaro said of Houston.

Higher Inventory

Nationally, the inventory of senior-housing units is at the highest since at least the fourth quarter of 2005, according to the National Investment Center.

Demand has so far kept pace, with occupancies climbing to 89.8%, the highest since 2008. The average rent rose to $3,415 per unit in the first quarter, up 2% from a year earlier, and is at the highest since at least 2005.

"The supply issue is a concern," said Goltra of Forward Management, which oversees more than $5 billion of assets. The firm had shares of Ventas, HCP and Health Care REIT as of the end of March, according to data compiled by Bloomberg.

"Supply is a concern, but this demographic wave is real," Goltra said.

While construction slipped in the first quarter, the decrease may have been related to weather, the National Investment Center said last month. Construction as a percentage of inventory has hovered at more than 3% in the past year, a rate unmatched since the first quarter of 2009.

"There's a lot of people that have begun to develop now," Gehl said. "You're seeing lots of shovels going into the ground now."

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