Why A Big Senior Living Development Rebound Is Unlikely In 2025

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Many senior living operators believe the industry’s biggest and best opportunity lies with the baby boomers. In 2025, time is already running out to build enough new communities to serve them all.

The problem lies in the sheer magnitude of the demand ahead, and the math required to get there. In a new article written for the Commercial Real Estate Development Association, NIC MAP Vision CEO Arick Morton lays out exactly what the industry must do to close its “supply gap” in the years to come.

As it stands, the senior living industry is on pace to fall 50% short of the inventory it needs in 2025. Late in 2024, senior living operators I talked to were hopeful that development and lending for new projects would pick up steam in the middle to end of the year. And to that end, there is some “cautious optimism” that lending for new projects could pick up in the year ahead, as NIC Senior Principal Omar Zahraoui wrote in December.

But the senior living industry is still mired in a “transitional phase” for development due to high construction costs, a lengthening timeline for new projects and the currently tepid state of lending, Zahraoui told me this week. Although some in the industry have hoped that the development “floodgates” open in 2025, current conditions suggest that is unlikely.

“While the cost of capital has improved slightly since last year, many projects still don’t pencil out, and the floodgates for new development are unlikely to open in the next 12 months,” he said.

In this members-only SHN+ Update, I analyze the current state of senior living development and offer the following takeaways:

• Why 2025 may not be the big growth year that some had hoped
• Pitfalls ahead for senior living development and growth
• New opportunities for senior living companies

Supply growth ‘will likely remain depressed for years’

In 2025, the oldest baby boomers turn 80, which is just shy of the average age of a typical senior living resident in the U.S. And yet, senior living operators still aren’t building enough new communities to meet the growing demand from this demographic – and there are indications that 2025 won’t be the catch-up year that some companies are hoping for.

Senior living companies have struggled to grow via new construction and development in recent years. High interest rates coupled with limited capital availability, coupled with a senior living construction timeline that is now as long as 29 months on average, has pushed senior living construction rates to “lows not seen since the Great Recession of 2008,” Morton wrote.

Currently, senior living companies are building at a rate of about 26,000 new units annually, a far cry below the industry’s peak rate of 56,000 units per year. As SHN has reported a couple times now, the senior living industry must develop new communities 3.5 times faster in the next six years in order to meet projected demand, according to NIC projections.

“Given multiyear predevelopment and construction timelines, supply growth will likely remain depressed for years,” Morton wrote. “Without the necessary investment, a $275 billion supply gap will emerge by 2030.”

At the same time, senior living properties are aging, and in 2023, 45% of all senior living communities were 25 years old or older. No doubt, some owners will shutter communities or convert them to other, better uses in the years to come due to that trend.

For many senior living companies, a big challenge has been sourcing the capital needed for new projects. On that front, there are some indications that conditions might be getting better, at least for now.

According to the latest data, new permanent loan volume for senior living “rebounded to its highest level since 2020” in 2Q24, surpassing $2 billion and representing an increase of 200% compared to the first quarter of the year, Zahraoui wrote.

Construction loan activity also has shown modest improvement, but lending remains below historical levels, he told SHN.

“That said, a recent and modest uptick in loan applications and approvals hints at cautious optimism for the future,” he added.

Interest rates are another pressure that has eased somewhat in the last 12 months. The U.S. Federal Reserve cut interest rates three times in 2024, with current indications that two more cuts might be on the way in 2025. Still, future cuts are not guaranteed, and the Fed has tied them to inflation in the past.

Based on all I’ve read and seen, I think the industry will likely struggle to eke out meaningful new development or construction in 2025. And conditions could always be worse than expected this year if new potential tariffs and mass deportations have an impact on the economy and inflation.

What all this means for the industry’s chances of meeting demand in the years to come is unclear, and many operators are holding their breath in anticipation of a new administration in 2025. But with each passing year that growth stalls, the industry’s chances to successfully meet the demand of the baby boomers wane.

By 2030, all boomers will be 65 or older. Though that might seem like a distant date, it is actually only five years away. The average senior living project takes almost 2.5 years to complete from start to finish, meaning that current projects would open in the middle of 2027 at the earliest.

At the end of the day, I think current challenges could represent an insurmountable obstacle for the industry’s quest to fully meet the demands of baby boomers. Now is the time for senior living operators to think outside the box and develop radical new models for meeting demand – including beyond real estate – or they very well might miss the boat in the coming five years.

Some big opportunities remain largely untapped

Although conditions for growth are challenging today, there is currently a high and growing level of demand for senior living services. And that alone could entice new entrants into the space or spur new innovative models.

“As I’ve noted previously, the ripple effects on project financing and timelines will take time to resolve,” Zahraoui said. “Yet, the senior housing market has consistently demonstrated resilience and a capacity to innovate under pressure.”

Looking across the industry, I do see some big opportunities left untapped, some of which I have written at length before.

For a few years now, I have thought that the middle market represents the industry’s biggest opportunity for growth, in addition to being a pressing societal problem. Millions of middle-income older adults will need and want senior living services in the years ahead. While there are several operators equipped to serve seniors in that demographic, whether the senior living industry can do so at scale is still an open question.

Active adult is another potential opportunity for growth. NIC MAP Vision data shows the current penetration rate for active adult is just 0.5% among households age 65 to 84, which is far lower than the average senior living penetration rate of about 11%

One caveat is that middle-market and active adult projects still require the same kind of construction lending as other senior living projects. That is why I think senior living operators should also look beyond real estate and consider diversifying with new service lines including telehealth, PACE or home health programs.

To Zahraoui’s point, senior living companies have in the past demonstrated the flexibility and creativity with which to pivot for the future. But the bottom line is that operators must move quickly to innovate for the future now before it’s too late.

The post Why a Big Senior Living Development Rebound Is Unlikely in 2025 appeared first on Senior Housing News.