The Demographics Meme: How an Influential Narrative Shapes Senior Housing Capital Allocation

Every asset valuation explicitly or implicitly includes three things:

1. Numbers – financial measurements and calculations.
2. Story – the narrative shaping future expectations.
3. Momentum – the degree to which a Story is accepted, amplified, and acted upon by market participants.

As a formula:

Valuation = Numbers x Story x Momentum

The impact of Story and Momentum on capital allocation and investment returns varies widely among asset classes. Their impact on safe, low-yielding assets (e.g., certificates of deposit) is generally limited. At the other end of the spectrum, “meme stocks” are valued almost exclusively on Stories and Momentum with little concern for Numbers.

A meme, after all, is just an easily understood and widely spread Story with significant Momentum:

Memes, however, are not exclusive to meme stocks. In public and private markets, narrative-driven enthusiasm can create a self-reinforcing cycle of capital attraction, disconnecting investments from fundamentals until the narrative shifts or reality intervenes. Stories are not always just explanations for Numbers. Stories themselves can attract capital.

It’s widely known that senior housing’s Numbers are rapidly improving. At a time when valuations are low by historical standards, occupancy and margins are both expanding while supply growth remains limited. Investors are drawn to the asset class on Numbers alone, yet these Numbers don’t capture the full picture.

In this post, we use a collection of time-series data to argue that a key feature of the senior housing investment thesis – America’s aging population – is a meme. We show that this meme had a significant impact on senior housing capital allocation for years until COVID interrupted its Momentum. We then explore the implications of this analysis for investors today and in the future.

The Data

To examine the impact of sector-specific Stories on capital allocation in the past, we compared senior housing with the largest commercial real estate asset class in the United States: multi-family.

Multi-family and senior housing should respond similarly to interest rates, construction cost inflation, and the law of supply and demand. Yet, the data shows they exhibited striking differences during the last cycle. Multi-family responded logically to changing conditions, but senior housing went through a 14-year period of exuberance, correction, and collapse that was persistently disconnected from a key Number: vacancy rates.

The following graph presents construction activity for each sector from 2011 - 2024, as measured by unit construction starts as a percentage of existing inventory (“starts-to-inventory”).

After the Great Financial Crisis, cheap capital fueled increased construction in both sectors. Senior housing construction, however, rose far faster, peaking at 4.4% when multi-family was only 1.6%. Then in 2018, two years before the pandemic, senior housing construction began a precipitous decline.

In 2020, COVID arrived and had remarkably different impacts on the two sectors. As supply chains shut down and the cost of raw materials spiked, senior housing construction continued to slow. Multi-family construction, however, accelerated to a record high in 2022.

As the federal reserve began hiking interest rates in 2022, construction for both sectors predictably declined. However, the rate of decline for senior housing exceeded that of multi-family, with multi-family starts-to-inventory passing senior housing in 2023 for the first time in over a decade.

While both sectors experienced construction booms and busts, they differed significantly in magnitude and timing. Senior housing’s development surge was more pronounced, and its decline started four years before rate hikes arrived. Although the pre-COVID gap is less dramatic, property values followed a similar trajectory:

As with starts-to-inventory, senior housing appreciation outpaced multi-family from 2011 – 2017. Then, after a minor correction in 2018, values collapsed during COVID.

Graphs 1 and 2 show that the sectors responded differently to zero-interest rate policy during the 2010s, and to raw material inflation brought on by COVID. However, these graphs alone do not prove the influence of Stories. The differences could theoretically be explained by changes in demand.

To investigate this, we examined the relationship between vacancy rates and starts-to-inventory.

These graphs reveal a key difference between the sectors. In Graph 3, multi-family presents as a normal functioning market with a clear linkage between demand and supply. As vacancy rates decline (i.e., occupancy increases), construction increases. This linkage is particularly clear during COVID, when the industry responded to declining vacancies with a surge in development.

Graph 4, by contrast, exhibits prolonged periods of disconnect between senior housing supply and demand. Despite climbing vacancies from 2014 – 2018, construction increased or remained at elevated levels. Additionally, after spiking during COVID, vacancy rates began rapidly declining in 2022. Yet, starts-to-inventory continued to decline and reached all-time lows in 2024. During these periods, supply growth did not respond to changes in demand.

Interpreting the Data

The data presented leaves no unanswered questions regarding multi-family. Each movement in construction or property values can be explained by macroeconomic forces or changes in demand. Construction initially surged during the zero-interest rate policy era, then moderated in 2015 as vacancy climbed. Then, during COVID, rate cuts and changing consumer preferences led to rapid appreciation of single-family homes, driving many would-be buyers into apartments instead. Simultaneously, concerns over the virus discouraged people from cohabitation. Multi-family occupancy spiked, and construction starts followed. Numbers, not Stories, appeared to guide multi-family capital allocation.

The senior housing data, however, shows the opposite. The dramatic cycle of exuberance, correction, and collapse, disconnected from vacancy rates, implies the presence of Stories. These Stories interrupted the feedback loop between supply and demand and shaped unrealistic investor assumptions about future cashflows and their timing.

Two key Stories influenced senior housing. One fueled a boom, the other a bust.

The construction boom hinged on a simple Story: America’s population is aging. Yet, timing matters. Between 2010 and 2018 the oldest Baby Boomers aged from 65 to 73 – far younger than the average assisted living entrance age of 84. Despite this inconsistency, investors ignored climbing vacancies and continued to build. New capital, energized by aging population statistics, flooded the industry from sources with no previous senior housing experience. They were too early, but the Story’s Momentum was peaking, and the self-reinforcing cycle of capital attraction was underway.

Finally, in 2018 the market responded to rising vacancies and construction began to decline. Under normal circumstances, this decline would have persisted until vacancy trends reversed, and a new equilibrium would have been reached. Construction would have flatlined or increased.

However, COVID provided an exogenous shock that interrupted this natural equilibrium. As a virus most lethal to the elderly, it was uniquely devastating to senior housing. Deaths, move-outs, and a wave of negative media attention created a new, bearish Story that temporarily replaced the old one: senior housing facilities were dangerous.

Additionally, inflation impacted the sectors differently. Senior housing is a labor-intensive business with lower operating margins (20-30%) than multi-family (50-65%). Multi-family successfully offset expense inflation with rate increases, but senior housing was initially unable to because vacancies spiked, and operators didn’t want to encourage more move-outs. Operating performance suffered, capital fled, and construction continued to decline. Valuations collapsed.

In 2022 rate hikes impacted each sector similarly, but they arrived as the sectors were in completely different cycle stages. ?For multi-family, they interrupted a bull market. For senior housing, they compounded a bear market. Throughout 2024 senior housing vacancy and margins improved, yet construction continued a six-year decline. Now, construction levels constitute a crisis. Like the 2010s, supply and demand are disconnected, but this time in the opposite direction.

With growing demand and limited supply, senior housing Numbers are rapidly improving. However, the bullish Story of the 2010s is also regaining its Momentum.

The Demographics Meme

America’s aging population is an inexorable truth. A slow-moving train obvious to everyone, and a one-chart investment thesis that is simple to articulate and understand:

In other words, demographic change is a meme. And like other memes, it captured investors’ imaginations during the last bull market and drove capital allocation decisions that were disconnected from operational realities.

Tesla trades at a 105 price-to-earnings ratio because “the electric vehicle transition is inevitable,” Bitcoin cyclically peaks at new highs because it will “replace gold as the ultimate store of value,” and senior housing investors responded to four consecutive years of rising vacancies by increasing construction because “demographics are destiny.”

The analogy to meme stocks has limitations because of liquidity differences. Buying overvalued public securities requires one individual to click a button. Buying overvalued real estate (or building in a saturated market) requires justifying projections to capital partners and lenders, which serves as an impulse check. Yet, private markets are not immune to the distorting effects of narratives. If they were, WeWork would not have reached a $47 billion valuation (“flexible co-working is the future”), and subprime mortgages wouldn’t have fueled a global recession (“housing always appreciates”).

To be clear – our investment thesis at Silver Wave Capital is based on Numbers. We’re buying discounted senior housing assets as nationwide operating performance improves.

Our contention, however, is that focusing exclusively on Numbers understates the forthcoming wave of capital allocation into the sector by discounting the effects of Story and Momentum. As we have seen, senior housing construction and values trended up for much of the 2010s despite years of deteriorating fundamentals. The Demographics Story overrode the Numbers and attracted capital until a once-in-a-century pandemic temporarily inverted the narrative. The trajectory went like this:

Now, COVID is in the past, the Numbers are improving, and The Demographics Story is reemerging from the pile of pandemic-focused negativity it was buried under. We see evidence of this in many places. The business of elder care and the societal implications of America’s aging population receive constant media attention (e.g., the NYT’s “Dying Broke” series and comparable features in the Washington Post). Additionally, Google keyword search traffic changes are dramatic:

These trends are notable over both long and short time horizons. “Senior Living” search interest increased 163% since 2010, and “Aging Population” surged 78% since 2021. “Demographic Change” is up 392% since 2010 and 112% since 2021.? Beyond mainstream media and search traffic, there’s a growing focus on demographic change and senior housing from the business community. Recent examples include NCREIF’s addition of senior housing to its expanded property index, Bloomberg’s video feature on the senior housing supply crisis, and numerous research reports forecasting senior housing as a top performing commercial real estate asset class.

With COVID fading into the background, The Demographic Story’s sheer simplicity and undeniability are launching it back to the forefront of public consciousness. It’s one of the dominant narratives of our generation, and its salience will only increase as time passes.

Because Stories and Numbers feed off each other, the biggest risk to the Story’s forward Momentum from a senior housing investor’s perspective is a collapse in the industry’s Numbers. However, absent another black swan event, that’s extraordinarily unlikely to happen. Consider the following:

• NICMap Vision, the industry’s leading data provider, believes senior housing must be developed at twice the highest recorded pace of new construction to keep pace with demand.
• Yet, construction is near all-time lows.
• At current construction levels, NICMap Vision fears a 550,000-unit shortfall by 2030. For context, there are approximately 1.1 million units in the U.S. today.
• Public REIT data shows expanding margins throughout 2023 and 2024.
• Staffing – senior housing’s biggest challenge – significantly improved in 2023/24. Nationwide senior housing employment is now 5% higher than before COVID.
• Median senior household net worth and income significantly outpaced senior housing rent growth over the past decade. Affordability is improving.
• Penetration rates returned to their pre-pandemic level of approximately 11% in 2023. Recent occupancy growth was therefore a product of growing demand, not mean-reversion after COVID.
• Outside of stabilized Class A buildings in major metros, virtually every facility is selling below replacement cost.

At present, senior housing is characterized by explosive demand growth, constrained supply growth, improving affordability, expanding margins, and attractive valuations. With a long runway for improving Numbers, The Demographics Story will likely return to attracting capital itself.

It’s becoming, once again, The Demographics Meme.

This Time is Different

During the last bull market, The Demographics Story primarily impacted construction. Although senior housing appreciation outpaced multi-family for seven years (Graph 2), the gap in construction starts between the sectors was far wider. Capital was cheap and construction costs were low, so investors built.

Now, the environment is different. Construction costs are up 30-40% since 2019, and development only works in wealthy markets that can tolerate high rents. Thanks to raw material inflation, significant rate cuts are necessary to spur construction, and bond markets are skeptical they will happen any time soon. When construction does eventually increase, it will take years for new projects to advance through pre-planning and development.

The Demographics Story, then, is more likely to drive capital towards existing assets rather than new developments for the foreseeable future.

While every asset valuation involves a Story, not every Story is a meme. A meme is a widely propagated simple narrative that fuels enthusiasm and, at times, disconnects investment decisions from fundamentals. The Demographics Story was once a meme that attracted capital to senior housing. By all indications, it’s becoming one again.

We like the Numbers, and we like the Story.

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