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Perhaps nothing is as predictable in American economics as the growth of the U.S. senior population.

According to the Center for Housing Policy, the population of individuals aged 65 or older will increase 120 percent by 2050—from 40 million to more than 88 million. In other words, approximately one in five Americans will be over the age of 65. In 2010, only about one in eight Americans was over the age of 65. Perhaps most remarkably, the number of Americans age 65 or older will more than triple to 19 million.

The most obvious implications of this booming elderly population relate to the impact on communities associated with retirement (e.g., Florida and Arizona); housing choices (e.g., smaller residences with fewer steps); demand for affordable housing for people on fixed incomes; and capacity to support the quality of life of people with disabilities.

While it seems obvious that demand for long-term care facilities will explode going forward, the reality right now is that very few older adults live in long-term care facilities or in community housing. In 2007, only about 4 percent of the 65 and older Medicare population resided in long-term care facilities such as nursing homes, according to the Center for Housing Policy. Another 2 percent lived in community housing with at least one service available (e.g., meal preparation, housekeeping or help with medications).

Meanwhile, 80 percent of older adult households are homeowners, and many of them own their homes outright. In fact, the homeownership rate actually exceeds 80 percent for those aged 65 to 84.

Still, the conventional wisdom seems to be that the demand for senior housing will skyrocket and that many seniors will at some point leave their current residence. The global construction market for senior housing is projected to more than double to $127 billion by 2023 in G20 nations alone, according to Lux Research—expanding at a compound annual growth rate of 8 percent during the next decade.

Recent data indicate that the market for senior housing may be solidifying, setting the stage for rising construction volumes going forward. Occupancy rates for all campus types with the exception of assisted living increased during the second quarter of 2014, according to National Investment Center for the Seniors Housing & Care (NIC).

Assisted living’s reduced occupancy year-to-date is likely due to growth in the number of units. While construction is minimal in many markets, areas such as Houston, New York, Dallas and Boston are associated with active senior housing development.

Despite favorable demographics, the senior housing industry has had a tendency to overbuild in recent years. That may be happening again. According to Green Street Advisors, a jump in unit supply is projected to slash growth in senior housing net operating income from 3.3 percent this year to 1.8 percent in 2015 and 1.4 percent in 2016. If those forecasts come true, the recent acceleration in construction may pause again, at least for a time.

The increase also may damage health care real estate investment trusts, which enjoyed soaring valuations early last year but have represented the worst performing part of the property trust market during the past 12 months, according to Bloomberg.

Too much construction may be responsible. The United States was home to 526,144 senior housing units in the 31 largest markets during the first quarter of 2014, up 1.4 percent from a year earlier with an additional 16,181 units under construction, according to NIC.

Unit construction slipped during the first quarter, likely due to weather. So far, demand has kept pace with new unit development, with occupancy climbing to 89.8 percent, the highest since 2008. Average rent expanded to $3,415 per unit during the first quarter of 2014, up 2 percent from a year earlier.

But construction as a percentage of inventory has hovered at more than 3 percent during the past year, a rate unmatched since the first quarter of 2009. That supply has become a source of concern among investors. 

Looking Ahead
Peak demand for senior housing is about 15 to 20 years away. Senior housing constructionshould expand over time, but many factors are involved, including the desire of many older Americans to remain in their own residences as they age. The growth of the home health industry combined with retrofits to existing homes could allow many older Americans to indefinitely postpone moves to continuing care retirement communities. While it is assured that everyone will get older, where they will live during their golden years remains uncertain.

Anirban Basu is chief economist for Associated Builders and Contractors. For more information, visit abc.org.

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