What Happens When Demographic Trends Betray Investors
November 18, 2019 | James Sprow | Blue Vault
One of the most reliable and useful classes of statistics when it comes to making forecasts of market demand is demographic data. For example, to forecast the demand for household formations in five years, we can use a percentage based upon experience that shows how many people within each age cohort will be forming a household in any given year. The age cohorts are relatively easy to forecast, given that all future 25-year old persons who will be around five years from now are pretty close to the current cohort of 20-year old persons, with a few minor adjustments for mortality and immigration. Certainly, the forecasts won’t be perfect, but compared to forecasts of interest rates five years from now, or the S&P 500 Index value five years from now, many demographic forecasts are both easy to make and reasonably accurate.
An example of how demographic forecasts can lead to overconfidence in predicting demand is the senior housing sector. A recent article in the Wall Street Journal points out that the demand for senior housing facilities has disappointed developers and senior housing companies that have spent billions of dollars over the past five years to build facilities that provide housing, food, medical care and assistance for the elderly. Real estate investors have been counting on the huge baby-boomer generation, 72 million people born between 1946 and 1964, requiring hundreds of thousands of new senior housing units. Unfortunately, it turns out that the demand for elderly care has failed to live up to expectations.
What happened? In part, the explanation is rooted in technological change. The WSJ article cites the flow of about $1 billion per year of venture capital into “aging-in-place” technologies that enable seniors to access care in their own homes. There is also a trend toward longer life spans and better health. The average age of people entering senior housing has been rising, from 82 years in 2010 to 84 to 85 today.
Occupancy rates are falling and could continue to drop as more senior living units are completed. Developers added 21,332 new units in 2018, more than double the number added in 2014. Senior housing has been the fastest growing sector in commercial real estate according to Green Street Advisors. The National Investment Center for Seniors Housing and Care (or “NIC”) reports that occupancy rates dropped in Q3 2019 to 88% compared to 90.2% in Q4 2014.
One of the casualties of the trends in senior housing has been Ventas Inc. The large healthcare REIT has reported occupancy rates dropping in their senior housing communities for the 17th straight quarter, on a year-to-year comparison basis. Five years ago Ventas (NYSE: “VTR”) common stock traded as high as $91 per share. On November 15 it traded at $58.25.
Here’s what Debra A. Cafaro, Ventas Chairman and CEO, had to say recently: “Given challenging senior housing market conditions, our senior housing operating portfolio did not perform consistent with historical patterns or our expectations in the quarter, a trend we expect to continue for the balance of the year. As a result, while national leading indicators of supply and demand in the senior housing sector continue to improve, giving us confidence in the powerful upside that lies ahead, we have reduced our 2019 property level guidance for our senior housing operating business. This changed expectation leads us to conclude that our return to enterprise growth will occur after 2020.”
Bottom line, just counting on demographic trends alone to provide growth potential in any sector is not enough. Investors also must consider the impacts of technology, social trends, lifestyle choices, health, and other factors when forecasting demand for any type of real estate.
Sources: Wall Street Journal, Green Street, Ventas
