Guest Contributor: A New Leader in Commercial Real Estate?

Industrial narrowly knocks senior housing out of top position—but the win is likely short lived

By: Jess Stonefield

Industrial real estate’s one-year returns have barely squeaked out a win over commercial real estate’s (CRE) most consistent performer, senior housing, for the first time in years. The sector ended its Q1 2017 returns at 12.18 percent vs. senior housing’s 12.05 percent, according to NCREIF NIC. While it’s an incredibly small margin, the loss was a surprise to many steadfast investors in the niche senior housing economy. So, is the win a long-term trend—or merely a minor blip in senior housing’s consistently top performance? Based on market conditions, the latter is far more likely.

Indeed, both industrial and senior housing seem confident that the long-term outlook for each industry remains strong. But, both have different strengths—and pain points—in the marketplace. While senior housing is a need-based sector, and therefore considered to be recession-resistant, the industrial sector’s pain points are more tightly linked to economic conditions. Below is a brief overview of the elements facing each industry, including why senior housing is likely to end up on top.

A Growing Economy—Or Is It?

One of the main reasons attributed to industrial CRE growth is the rise of e-commerce. With so many retail giants making a killing online, they’re quickly looking to expand the presence of warehousing locations throughout the country to better service their growing client bases. In fact, in the second half of 2016, JLL reported, the vacancy rate in the industrial market reached a 16-year low of 5.6 percent because of such high demand. But will that demand continue? Some believe that the United States is due for an economic recession.

Says one expert, “Capitalist economies do not simply grow steadily larger.” In the last century, the country has seen a recession roughly once every five years. Given the Great Recession ended in 2009, it would seem we may be overdue. With that in mind, quite possible the current boom could end with a massive amount of warehouse space—but not much to put inside them. On the flip-side, senior housing is a need-based expense. While many can—and do—decide to curb their retail expenditures during a recession, many in senior housing simply have no choice but to stay the course. Indeed, outside of independent living, the other sectors of senior housing do not heavily correlate to the housing market at all, making senior housing a recession-resistant investment.

Bridges and Walls—or Beds and Windows?

One reason many believe industrial growth will remain strong through 2020 is that the current political administration has promised increased spending on infrastructure expansion—including bridges, roads, and of course, walls. On the other hand, the administration is already cutting Medicare and Medicaid, which many senior facilities—especially skilled nursing and transitional care—have come to rely upon. While industrial growth may remain strong through 2020, I’d still venture to say senior housing will remain stronger longer. For one, there is a huge force in the United States to make sure the current administration does not remain past the first term. And second, demand for senior housing is expected to grow not just through 2020—but through 2040. And these are not just projections. The growth is based on a demographic trend of aging baby boomers—boomers lacking family to care for them, and with funds to spend on quality support.

Industrial Strength—Or Weakness?

From the outside, it would appear the industrial sector is larger and stronger than senior housing. After all, senior housing is a niche market—a mix of retail, hospitality, and healthcare often misunderstood by investors. But the fact remains that senior housing is not just likely to remain less volatile—it is likely to expand greatly in the next two decades. For one, the largest segment of the senior population has not even reached the age of the average senior community resident, indicating that the largest push for demand is yet to come.

Indeed, as the senior population climbs to 72 million by 2030—more than doubling from the year 2000—families throughout the country will be looking for safe, accessible, social spaces where their parents can live comfortably and happily AEW (2015) for the remainder of their lifetimes. This isn’t growth that relies on a good business plan, low interest rates, or steady incomes. The only thing it needs is for nature to take its course.

The opinions in the preceding commentary are those of the author alone and do not necessarily reflect the views of The DI Wire.

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Jess Stonefield is a contributing writer on aging, technology, senior care, housing, and the greater longevity economy for publications such as Forbes.com, Entrepreneur, and CNN Money. She also serves as communications expert for Senior Living Fund.