Financial Professionals Turn to Life-Event-Driven Real Estate: Part 2

Topics: Capital Markets/Commercial Real Estate, Article

As economic uncertainty swirls, some commercial properties show resilience

In part one, we highlighted the host of challenges investors may need to contend with in 2024 to help navigate a range of political and economic uncertainties that could influence portfolio performance. We also discussed the need to remain watchful and be nimble to change portfolio allocations if needed.

While some commercial real estate sectors are facing their own set of challenges as the industry enters the late stage of the real estate cycle, we believe there are certain sectors positioned to withstand headwinds, and this second blog introduces a few more of those property types and explains why we think they are likely to continue to perform well.

The Growth of Life-Event-Driven Property Types

A phrase you may begin to hear more frequently in relation to commercial real estate is “life-event-driven property types.” As introduced in our first article, these sectors of commercial real estate are those where demand is driven by life events rather than economic growth.

The life-event-driven moniker refers to property types that most of us will personally encounter and use at different stages of our lives. These properties regularly appear to be in high demand and include:

  • Student Housing
  • Self-Storage
  • Healthcare
  • Manufactured Housing Communities (MHC)
  • Senior Living

In fact, as we illustrated in our earlier blog, it is not uncommon for consumers to use more than one of these properties at the same time. Our hypothetical case study introduced you to Robert and Sue Farrington, a successful couple helping their three daughters – two navigating the early stages of college, and the third undergoing surgery for a soccer injury. The Farringtons found themselves using student housing, self-storage, and outpatient healthcare concurrently.

We revisit the Farringtons a few years later to illustrate how they encounter other life-event-driven properties like manufactured housing communities and senior housing as they age.

A snapshot of these asset classes illustrates their enduring appeal:

Manufactured Housing Communities. According to recent insights from ManufacturedHousing.org,1 manufactured housing offers affordability, safety, and satisfaction that other housing solutions cannot:

Affordability

  • The average cost of a manufactured home is $127,250 vs $413,160 vs a site-built home
  • The average cost per square foot of a manufactured home is $85 vs $167.87 per square foot for a site-built home

Satisfaction

  • 95% of residents in 55+ communities and 87% of residents in all-age communities’ report satisfaction with their homes

Safety

  • Manufactured homes must be built to the HUD code, a single uniform regulatory framework for home design and construction, including standards for health, safety, energy efficiency, and durability.

Senior Housing. According to data collected by the known industry-resource aplaceformom.com2, senior housing demand is growing and is expected to for years.

  • With 7 out of 10 people requiring assisted living care in their lifetime, demand is expected to grow by an additional one million beds by 2040
  • Occupied senior living units are at an all-time high, according to data from the National Investment Center for Seniors Housing and Care
  • Senior living facilities (including independent living, assisted living, and memory care) had an average occupancy rate of 84.2% as of August 2023
  • The U.S. assisted living facility market size was valued at $91.8 billion in 2022 and is expected to expand at a compound annual growth rate of 5.53% from 2023 to 2030, according to Grand View Research market data

Meeting Consumer Needs Throughout Life

As you can see in this illustration, five generations are currently using life-event-driven properties. And each is a sizable cohort that we believe will continue to fuel demand for these real estate assets for years to come.

US-Population-Age-Generation-8

Source: U.S. Census Bureau

A Case Study: Revisiting the Farringtons

In our previous post, we introduced you to the Farrington family and how they utilized three life-event-driven properties at the same time. Fast forward a few years and all three daughters have graduated from high school and college. The two college graduates are pursuing their careers, and now we still find the Farringtons entwined with other life-event-driven properties.

As empty nesters, Robert and Sue decided this was a good time to downsize. They sell their home and buy into a 55+ community. They rent a self-storage unit to store the furniture they don’t need in their new home, knowing their daughters may want some of it one day.

Shortly after relocating, Sue’s father passes away, and in the ensuing months, the Farringtons help Sue’s mother sell her home which she can no longer take care of on her own. They find a manufactured housing community for her with smaller homes in a secure, vibrant residential community. Sue’s mother will enjoy the upscale amenities and array of social activities with fellow residents for years.

A few months later, Robert has to make the difficult decision to move his father, who has been battling dementia, into a private-pay senior housing facility that has the staff and memory-care services to take care of him now that he’s unable to live on his own.

In a relatively short time span after their daughters graduated, the Farringtons continued to need essential live-event-driven properties, confirming the premise that despite market or economic conditions, there are certain commercial real estate properties that will always be necessary to meet the needs of each generation as it progresses through life.

Ultimately, the performance of any real estate property is all about supply and demand. So, we believe the asset classes positioned for continued demand that intersect with so many areas of our personal lives should be a notable commercial real estate strategy to research.

 

Some of the risks related to investing in commercial real estate include, but are not limited to: market risks such as local property supply and demand conditions; tenants’ inability to pay rent; tenant turnover; inflation and other increases in operating costs; adverse changes in laws and regulations; relative illiquidity of real estate investments; changing market demographics; acts of God such as earthquakes, floods or other uninsured losses; interest rate fluctuations; and availability of financing.

1https://www.manufacturedhousing.org/about-manufactured-homes/

2https://www.aplaceformom.com/senior-living-data/articles/assisted-living-statistics#assisted-living-industry-statistics-5-key-facts