A.CRE

Age-restricted Community

In commercial real estate, this typically refers to a restriction on residential communities, where residents must be a certain age or older, often 55+. Investors often see these communities to have an advantage based on residents having surpassed periods in life with conflict (such as divorce or income difficulties), where residents may have also downsized from traditional housing and have more steady income (either from fixed pensions or social security payments) than demographics of all-age communities.

Putting ‘Age-Restricted Community’ in Context

Scenario Overview:

Evergreen Capital, a real estate investment firm, is considering the acquisition of Sunridge Senior Living Community, an age-restricted community located in Scottsdale, Arizona. The Senior Acquisitions Analyst, Sarah Thompson, has been tasked with analyzing this core acquisition investment.

Property Details:

  • Property Type: Multifamily – Senior Housing
  • Location: Scottsdale, Arizona
  • Total Units: 150 units
  • Resident Age Requirement: 55+
  • Average Monthly Rent: $2,500
  • Occupancy Rate: 95%
  • Net Operating Income (NOI): $3,562,500 per year
  • Purchase Price: $50 million
  • Cap Rate: 7.125%

Contextual Analysis:

Sunridge Senior Living Community is a well-established age-restricted community designed for residents aged 55 and older. The property features amenities tailored to senior living, including a clubhouse, fitness center, swimming pool, and various social activities that cater to the lifestyle preferences of its residents. The community’s location in Scottsdale, a city known for its warm climate and high quality of life, makes it particularly attractive to retirees.

Investment Rationale:

Sarah identifies several advantages to investing in an age-restricted community like Sunridge:

  • Stable Income Stream: The residents, primarily retirees, often have steady income sources such as pensions, social security, and retirement savings, reducing the risk of rent defaults.
  • Low Turnover Rate: Age-restricted communities typically experience lower turnover rates compared to all-age communities, as residents tend to stay longer once they move in.
  • Market Demand: With the aging baby boomer population, there is increasing demand for senior housing, making this a growth area within the multifamily sector.

Financial Analysis:

Sarah conducts a financial analysis to determine the potential returns on investment:

NOI Calculation:

Given the high occupancy rate of 95%, the total annual rent is:

  • Total Annual Rent: 150 units × $2,500 monthly rent × 12 months × 0.95 = $4,275,000
  • Assuming operating expenses are $712,500 per year, the NOI is: $4,275,000 – $712,500 = $3,562,500

Cap Rate Calculation:

  • Cap Rate = (NOI / Purchase Price) = ($3,562,500 / $50,000,000) = 7.125%

Conclusion:

The acquisition of Sunridge Senior Living Community aligns with Evergreen Capital’s core investment strategy, providing a stable and attractive return on investment. Sarah’s analysis highlights the advantages of investing in age-restricted communities, particularly their ability to generate steady income and cater to the growing demand for senior housing. Given the strong financial metrics and market demand, Sarah recommends proceeding with the acquisition.

Click here to get this CRE Glossary in an eBook (PDF) format.
by