The Senior Housing Shortage: How Investors Can Profit From Rising Demand

Vern Harris (00:00)
Yeah, so a hundred and seventy seven thousand units needed next year. On average they’ve been building about twenty six thousand units a year for the last ten years. The most that they’ve ever built was around fifty four to fifty six thousand units. I don’t remember the number exactly, but somewhere in that range. That’s the most that they ever built.

Cody Crabb (01:58)
Welcome back to The Real Estate Pros Podcast by Investor Fuel. I’m your host, Cody Crabb, and today I’ve got Vern Harris with me.

Vern is a partner at ABW Senior Investments, where he helps acquire assisted living, memory care, and senior housing properties across the country. We were talking before the show about the growing gap between senior housing demand and available supply, and why he believes the next few years present a huge opportunity for investors. Vern, thank you so much for coming on the show. I appreciate it.

Vern Harris (02:26)
Thanks for having me, Cody.

Cody Crabb (02:27)
Of course. I’d like to know a little bit more about just just to introduce yourself a little bit. Like how did you get into real estate? You know, where where are you how how long have you been in real estate? I mean, it’s is this something you’ve always done or did you end up pivoting at some point?

Vern Harris (02:43)
No, I pivoted, you know, my my prior life, I was an entrepreneur and had a sign company. And so one of my mentors when I was doing that was a business broker and I was always fascinated by the business aspect. And then I got involved in real estate investment back in two thousand fourteen, I guess. And you know, I’ve always been interested in it.

But that was an opportunity for me to kind of pivot in my life and and get involved in it. And when I was after I was investing for a couple of years, I got my broker license and was looking for a niche to become proficient in and ran across this thing called assisted living, which is a combination of businesses and real estate. And because I had the interest from a business.

from my mentor and being an entrepreneur and now I’m in real estate, I thought it was a perfect fit for me. So that was back in two thousand and fifteen, I guess. And I’ve kind of been focusing in on this assisted living space since then.

Cody Crabb (03:54)
That that’s that’s great. So I think my first question to you would be, what was it about assisted living specifically or or the senior senior opportunities that made you think this is the opportunity? Is it was it just like, you know, it the opportunity was there and and it seemed to work, so you went for it, or was there more that was calling out to you?

Vern Harris (04:16)
Well, you know, in real estate, if you really want to be successful, you want to invest where there’s growth. So if you have a master plan of a community and you know that there’s growth, they’re gonna be building a mall or something, you may want to go buy that land before they start developing. And then you’re gonna make the most out of it. Well, this is growth, but it’s in demographics.

Cody Crabb (04:40)
Yeah, let’s let’s talk a little more about this because I’m I’m vaguely familiar with the baby boomers are called that because there are so many of them. And that eventually someday they are going to transition, whether that’s where they live or they are not going to be able to take care of themselves and there’s going to be a big shift. So talk to us a little about that and what this demand is going to start looking like.

Vern Harris (05:51)
Well, they’ve already started. And when I got involved in two thousand fifteen, the number was ten thousand people a day were turning sixty five years old and four thousand people a day were turning eighty-five years old. And when they hit that the eighties, that’s when they really need help, but some need help in their sixties. I think it’s nine percent of the people over sixty five actually need some sort of assistance with their activities of daily living.

Cody Crabb (06:20)
Now is that like what like when you say assistance, is are we talking like need someone in house or like might need help taking out the garbage cans? Like like what level are we talking about?

Vern Harris (06:29)
Activities of daily living are, you know, being able to brush your teeth, toileting, getting dressed, cooking for yourself, taking your medications. There’s about eight different activities of daily living that we need to be self sufficient. And nine percent of the population that’s sixty five and older needs help with that. That’s a pretty big number.

Cody Crabb (06:53)
Yeah it is. Holy cow.

Vern Harris (06:54)
Yeah. And I think that the number of how many people are turning sixty five has gone up a little bit since you know we were quoting the ten thousand a day. But even if you look at that that ten thousand a day, that’s that’s a really big number. And that’s gonna go on. We’re gonna see the boomers continue and continue to rise and start to level off around twenty fifty is when the boomer

generation tails out. And then we see a little bit of a drop with the I think it’s Gen X is the next generation after the boomers. Mm-hmm. But for the millennials, which are next, they’re a larger population than the baby boomers. So in twenty seventy, it’s going to really increase again. This is growth for the rest of the century.

Cody Crabb (07:44)
That’s really

Huh. I feel like I haven’t heard a whole lot of talk about millennials being so numerous. I wonder why that is. But

Vern Harris (07:53)
You know

thirty years away from that.

Cody Crabb (07:56)
Yeah, I guess that’s true. Yeah. Well

Vern Harris (08:01)
The same thing applies that right now we have the boomers that are hitting that age and need help. But you know, this this space is going to be in demand for the rest of the century.

Cody Crabb (08:13)
Yeah, and I do feel like it is it’s a little interesting because this isn’t your typical single family home. This is there they’re like you said, it’s kind of part business, part real estate. So tell us a little more about that. Like someone that is and it hasn’t done investments elsewhere, residentially or otherwise, this is more business than those things. There it seems like there’s a lot more to to take into account. And also tell us a little about how this works with like all the regulations. I’m sure there’s lots of

stuff you have to keep in mind there too.

Vern Harris (08:43)
Yes, every state has its own set of regulations. So depending on where you’re at, you just need to learn what they are. Usually you’re depending on your size. If you’re trying to do this as a residential style and you’re gonna be the one operating, then you need to know the regulations like the back of your hand. But like any any business that you’re in, there’s gonna be a set of rules and you just have to follow those rules.

Doesn’t matter what business you’re in, you’re gonna have to set of rules.

Cody Crabb (09:13)
They certainly make it seem simple. Sometimes it doesn’t really feel like that, but yeah, I guess that’s true. Yeah.

Vern Harris (09:18)
Maybe more rules. If you’re an attorney, you’ve got a lot of rules you gotta cover. If you’re a CPA, you have a lot of rules. So, you know, that’s it’s just business is business. It’s that’s one thing I’ve always liked about business. It’s the same basic thing across several different genres.

Cody Crabb (09:33)
Yeah, in yeah, in general, you’re basically looking at the same handful of of principles for sure. So okay, something that you mentioned is that this is a that there’s not even close to enough that being built to satisfy this demand. So talk to us a little bit about this, because I what I also want to ask you is kind of a piggyback question to that.

Why is why are people not taking advantage of that? Like if like it’s it’s easy to say there’s a huge opportunity, but then that immediately makes me go, why isn’t everyone doing that? Like why isn’t why is why are the big dogs not put pouring tons of money in this? So I’d like to hear your your take on

Vern Harris (10:43)
Okay, so since COVID and we saw the price of labor go up significantly. We saw the price of goods go up significantly. So it just cost a lot more. There was a lot of building that was going on in the 2010 to 2020, and they were able to keep up with the demand with what they were building. But since 2020 with the expenses going up, it’s running about three hundred and fifty thousand to four hundred and fifty thousand dollars a unit to build a new one.

And it’s just gotten so expensive that unless you’re you’re building and the only people that are building are building Class A properties. So, you know, these super really nice big Class A properties is the only construction that’s going on. Meanwhile the Class B and Class C, you know, there’s always that need out there for it. And so we may see a you know, a Class A from ten years ago be kind of bumped down to a Class B and

so on, so your Class C’s, but they’re not it costs so much to build, they just can’t keep up with the the demand, the Silver Tsunami that we’re we’ve been talking about. Next year they’re going to need 177,000 units. This year it’s around 120,000 units that are needed.

Cody Crabb (12:05)
It goes up that much in just one year.

Vern Harris (12:07)
Yeah. And there’s a big spike. If we look at the graph, there’s a really big spike next year. I don’t know why. But twenty twenty seven it’s just shoots way up and it drops down again to maybe the one fifty ish range for the next several years after that. But

Cody Crabb (12:22)
Makes you wanna look back at the calendar that the far back see what was going on. But yeah. Anyway.

Vern Harris (12:27)
Yeah, so a hundred and seventy seven thousand units needed next year. On average they’ve been building about twenty six thousand units a year for the last ten years. The most that they’ve ever built was around fifty four to fifty six thousand units. I don’t remember the number exactly, but somewhere in that range. That’s the most that they ever built.

Cody Crabb (12:53)
You’re yeah, you’re saying that is like the absolute maximum that they’ve ever done and it’s still not even anywhere near enough.

Vern Harris (12:59)
So what they’re building today, they need five times that to meet the needs of next year. To meet the needs of this year they need three and a half times.

Cody Crabb (13:10)
So let me let me ask you this then. So if that’s the case, how do you know you would be a good candidate to look into this this industry? Obviously not everybody’s gonna develop their own and there’s lots of there’s lots of people do and we can talk about that. You’re you’re also kind of you take investments and and do things like that. But

who who should be really paying attention to this as a good opportunity? I mean, as an investment opportunity. Yeah. Any any opportunity is good if it has a return, obviously. But I just curious what you think.

Vern Harris (13:41)
Right. Well, I don’t know if any opportunity’s good if it has a return just because you don’t know what the future holds. And two years ago, multifamily that everybody thought that was great. Well mo multifamily is suffering today. And we’re seeing a lot of those guys get out of multifamily and actually come into our space. And we’re now competing with those multifamily investor guys, the syndicators, on deals that we’re bidding on.

Cody Crabb (13:49)
Yeah, I suppose that’s true.

Vern Harris (14:08)
And that wasn’t the case last year. It happened there. Something shifted in multifamily. I’m not sure what ’cause I don’t pay enough attention to it. But it we’re seeing the result of it. And when I talk to multifamily investors, they’re going, God, you know, we’re getting five percent returns. Wow. And, you know, I mean that’s good for some people, but it’s not good for your typical real estate investor. You know, now the stock market’s doing a little better than that, so

Cody Crabb (14:11)
Even less than

Yeah, seriously.

Wow. Wow.

Vern Harris (15:20)
Well,

real estate is always tangible, so that’s

Cody Crabb (15:22)
Yeah. This is really interesting to me because I feel like there’s not a whole lot of talk about you know, if you if this isn’t working, pivot to this. Because I feel like people kind of you talk about staying in your lane and weathering the storm and preparing for the future. So I I find it I find it interesting that you’ve kind of got the next twenty years of investments kind of figured out. Like you you said maybe around twenty fifty ish is when things are gonna

like pick up again or their or no, what was it? I think it was twenty fifty they would start to drop off and then yeah. And then twenty seventy they’d pick up again. So how do you even think about this in that sort of timescale? Like in my mind I’m like I can barely think of five years ahead. So what what is how are you managing that?

Vern Harris (16:07)
We we can look at trends and what’s going on and you know demographics are easy trends to measure and quantify. So that’s that’s really what we’re looking at. And you know, that’s the demand. Now that we don’t know what the supply will be, which is the other half of the equation. What we do know today is that the supply is low and we also know if you want to start one of these, if you want to develop one, it takes two

at least two years from the time that you get your approvals to get something built and then another year to get it stabilized. So the way we look at it today is we have a three year window to acquire as many units as we can possibly acquire and get the most out of it. Now that that could be a four or five year window because depending on when the people that are developing catch on and and start investing again

in the developments. But today they it’s gonna take three years before they can even start to increase the the supply that’s out there. And when we see a huge demand

and very little supply, then the result is the room rates, the bed rates will increase as the as the vacancy decreases. So you know there will always be vacancy in this space because unfortunately we’re dealing with people that are toward the end of life. And

you know, that’s the unfortunate part about this business is people pass away. So there’s always going to be some vacancy in there. We’re never gonna be a hundred percent for a long period of time. And the industry’s typically been around eighty-seven percent for the last several years. But that’s actually last year, I believe that went up to eighty-nine and I think last quarter, it went up over ninety percent.

Cody Crabb (18:14)
Wow.

Vern Harris (18:16)
And as a result, when you start having if you’ve got all the rooms filled, then it gives you opportunity to increase the rates.

Cody Crabb (18:25)
Yeah, of course.

Vern Harris (18:26)
And when you increase the rates, you know, this is this is commercial property and it is cap rate based. So for the listeners that don’t understand how that cap rate works, is basically when you increase the dollars, you’re increasing the the value of the property significantly.

And as the rent rates go up and the margins go up, the property value goes up significantly as well. So our plan today is to get as many units as possible and then wait and see. In the five to seven year range, we’ll probably put these out on the market again and then repeat the cycle. But there’s a huge upside that’s coming in the next several years.

Simply because of the supply demand problem.

Cody Crabb (19:17)
So something I would say, so let’s say I’m a newer investor, right? Obviously, you know, something like this, like you mentioned, there is a massive cost to getting these started start started up. The someone that is newer to investing and maybe doesn’t have all this capital, what would you suggest that they do to kind of get maybe their get their foot in the door?

Vern Harris (19:39)
Well research is always the best thing. It this is not something you just jump into because that’s very, very risky. Partnering with people that know what they’re doing is always the easiest path. That’s that’s usually what we suggest. And we work with a lot of investors that have single family homes and are looking to get out of the single family homes because, you know, tenants and toilets.

And they, you know, they’ll sell their properties and either exchange them into a deal with us or you know take the cap gains hit and and and invest in our deals. So that’s how we’ve helped those kind of investors. But if you want to do this on your own, there’s a lot of places to do research and learn about it. And you know, I actually run a

a meetup group that teaches people on the smaller side about assisted living. There’s there’s some probably half a dozen groups out there that teach people if they want to do the residential style assisted living. There’s some people out there that are training on that. So just do a lot of research and I would say, you know, you need probably two years of education under your belt

before you go and throw your money at it just to be safe. But if you want the shortest path then find somebody to partner up with that understands it and and does it for a living and yeah, work with them. It’s

Cody Crabb (21:08)
So so yeah, one question I’d have for you is so when you’re let’s say I just dropped ten million dollars in your lap for to to to invest in in more of these projects, do you think you would invest more in development or acquiring properties that currently exist and why?

Vern Harris (21:28)
I would acquire current properties today. There’s there’s a fair amount on the market today that are mismanaged. You know, you’ve got good real estate, but you’ve got bad operations. Hmm. So you can get those for a pretty good deal and you go in and turn around the operations and now you’ve got a viable asset that you know throws off pretty good cash and has some value to it. That’s where the

the biggest play is. Or, you know, you could go buy something that’s running just fine and pay higher dollar for it and still get a good return out of that. So, you know, that’s and just ride the wave. And and we’ve got a deal going right now in Texas that that’s exactly what we’re doing. It’s running great. You know, it we don’t have to do any turnaround. We’re gonna go in there, pick it up and ride the wave. And they haven’t raised their rates for three years.

That’s a big opportunity. They’re at least a thousand to fifteen hundred dollars under market.

Cody Crabb (22:27)
No kidding.

Yeah, wow. Okay, so this is this is an interesting this is an interesting thing I was gonna ask you about. So when it comes to like value add, is there opportunity in that sort of way where you can kind of expand things that already exist, or is it mostly like what what you buy is what you have and it’s it’s kind of stuck that way.

Vern Harris (22:51)
No, some people might buy something, has some land and they could add on to it. So we’ve seen some of that where you develop more beds. You know, still in the same space. You might you might do a if you have a strictly an assisted living, you might put a memory care facility on there so you have a feeder to that memory care from the assisted living. I know some guys out there that are developing the residential style on a large

piece of property. So they may do four sixteen bed facilities on a single property and turn one or two into memory care and have that residential style feeling for the others. And that’s a model that works pretty pretty good. You know, you’ve got sixty four beds. It’s no not all under one roof, but it is all on one property. So there’s some efficiencies of scale.

Cody Crabb (23:32)
Yeah.

Yeah. Well and and that makes me think too. You might be able to have some flexibility later on when it comes to stuff like you know, if you wanted to pivot or you had a lot of interest in memory care or something, it would make you it would you could kind of convert one or the other or change them around and stuff. So yeah. Lots to think about. Yeah, I think other other than like just the general residential and and memory care, are there other types of are there other types of locations that

that you would kind of recommend also looking into that kind of are in this niche?

Vern Harris (24:17)
Yeah, you know, in the group home space, there’s sober living that people do in residential homes. I actually have two sober livings in my personal portfolio. Rent houses that I rent to an operator and and she does sober living for her model is for women. And you know, I get above market rents for those single family homes. So

that’s an interesting space. Some of the houses that we have under triple net leases are traumatic brain injury. And some are mental illness. So we’ve got a few of those.

Cody Crabb (24:58)
Is there a name for kind of this general like group health type based, you know, is is there a name for it?

Vern Harris (25:05)
Group homes is kind of what we call it. And again, those are more the residential spot. Yeah. We’ve we’ve kind of shifted our focus into the the fifty to a hundred bed space of the assisted living. We’ve got about forty-five buildings in our portfolio, and I’d say about half of those are smaller, sixteen bed and under residential style, and the other half are over that sixteen bed.

And we just see that there’s a little bit more economies and scale when we go to fifty and better and we’re not competing with the REITs, which we’re looking for a hundred and fifty beds. So it’s kind of a sweet spot for our investing.

Cody Crabb (25:44)
Yeah.

Yeah, yeah. It sounds like it sounds like you’ve kind of found the niche and it you’re able to kind of approach it in a way where you know what you’re looking for and and you’re not just kind of approaching a deal is because it’s a deal. You know, you really seem to be you’re looking for specific stuff. So you you mentioned before we started recording that you have a you know, you’re you’re looking for investors currently. So can you tell us a little bit about what you’re looking for and what your what the opportunities are like?

Vern Harris (26:15)
Yeah, so abwseniorinvestments.com is our our website and you know we we’ve got probably about four hundred and fifty investors in our current pool, but it doesn’t take many deals because the deal size that we’re doing is anywhere from five to ten million. So it doesn’t take too many deals to burn through those investors available capital.

Yeah. We do use leverage though. So, you know, we’ve got a a deal right now that’s the the one in Texas I mentioned that is just under seven million and we’re raising about three million dollars for that particular deal. And then we have another one in Texas we’re looking at that’s probably gonna be about nine million and we’re we’re probably looking at about three and a half to four million dollars to raise on that one. So you know, we’re always inviting new people in and

you know, I can’t talk about what returns are on any particular open forum, but you know, we’re willing to talk and see if it’s a fit. And you know, we are very bullish on the space simply because of the demographics and the demand that’s there and what the supply is today. And you know, we welcome people that want to be a part of it. And the best part here’s the best part.

The best part about all this is we’re actually doing some good in this world. So that’s we’re not I was speaking with a guy earlier about oil and gas and you know, that’s kind of interesting space, but they’re drilling holes in dirt. We’re we’re helping people.

Cody Crabb (27:39)
Yeah.

Right. Right. Yeah.

Very directly too, yeah.

Vern Harris (27:55)
Warm fuzzy about what we do. That yeah, we’re we feel like we’re contributing to the good on this earth and that’s important to us.

Cody Crabb (27:58)
Yeah.

Yeah. Yeah, it’s and no one’s gonna complain about having a chance to do some good and make some money while you’re doing it. I mean that’s pretty much a win win right there. Well, thank you so much for all the insights you’ve given us. If someone wants to go may I maybe I missed it. Did you mention your website? I maybe I maybe you did.

Vern Harris (28:23)
abwseniorinvestments.com

Cody Crabb (28:25)
Gotcha. Awesome. Yep, everybody that it has this has caught your eye. It’s interesting to you. Go check that out. It sounds like you’ve got some interesting opportunities here. This was really informative for me. I didn’t know that the demographics were quite that broad of a number. I thought it was I knew it was like an inflated number, but I had no idea how how much. So this was this definitely gives me something to think about. Thank you what for for all of that. That’s that’s super informative.

And thank you, listeners, for giving us some time too. If you liked this episode, make sure you don’t miss the next one. And we’ll see you there. Vern, thanks so much for hopping on. Have a good one.