Long a multifamily brokerage specialist, Atlanta-based Apartment Realty Advisors (ARA) has expanded into seniors housing brokerage this summer. The privately held company has been ramping up toward this expansion for about a year. The move is spurred by its existing clients, especially institutional clients, who say that their investment criteria has shifted to include more seniors housing product.

Seniors housing offers higher returns than conventional apartments in today’s market, but investors also see major opportunities ahead. Because seniors housing, especially assisted living and skilled nursing care, tends to be needs driven, ARA is betting that the industry will prosper even during a recession. But more than that, ARA believes that seniors housing has demographics on its side as the U.S. population grows older.

NREI spoke with Jeffrey M. Pritchard, managing partner of ARA National Seniors Housing Group in the company’s Dallas office, about ARA’s plans to take advantage of investors’ newfound appetite for seniors housing.

NREI: Why is ARA getting into seniors housing brokerage?

Pritchard: Our core business is multifamily brokerage -- last year, about $7.7 billion worth. In early 2007, we identified related residential industries that would complement our business, specifically student housing and seniors housing, and we’ve been working toward building specialties in those industries. In the case of seniors housing, we felt that it was a good time to get in, given the long-term strength of the demographics supporting it. Our chairman, Gary Kachadurian, also had experience in seniors housing, so that spurred us in that direction as well.

NREI: What are your immediate goals for the new office?

Pritchard: Right now there are two brokers and myself here in Dallas, and we’re learning the nuances of the industry and pressing the flesh around the country. Eventually we want a physical presence on both coasts and Chicago, in addition to Dallas. That platform covers the country. Our mainstay will be brokerage, but since some of our clients will have various equity needs, we’ll also be involved in the placement of equity.

NREI: Who’s investing in seniors housing?

Pritchard: Some operators are looking to expand and are acquiring developments or existing facilities in partnership with a REIT, or another investor. Institutional investors also are coming into the space in force. We’re been talking to a good many institutional investors who aren’t in the seniors housing business yet, but who are looking at the space closely and will be investing in the near future.

An important reason for their interest is that apartment cap rates have been compressed in recent years, and so investors are looking for higher returns elsewhere. In the longer run, though, the aging of the U.S. population is spurring investor interest.

NREI: Which segments?

Pritchard: All of them, but assisted living and skilled nursing care more than independent living. If you look at apartment properties that happen to cater to older people, properties without a healthcare component, there’s really no difference in cap rates between them and standard apartments.

For independent living properties that provide some services, however, cap rates are 75 to 150 basis points higher than comparably-sized apartment properties. With assisted living, the difference is 200 to 300 basis points, and even more with skilled facilities. [As of April, the National Investment Center for the Seniors Housing & Care Industry put mean independent living cap rates at 7.6%, assisted living at 8.8% and skilled-care facilities at 12.8%.]

NREI: Geographically, where are seniors housing investors looking?

Pritchard: They are pursuing places with some barriers to entry because those barriers create value. There are stronger barriers on East and West coasts, and parts of the Midwest such as metro Chicago. Investors are definitely interested in those places.

They also are interested in markets where there is job growth among 40- to 50-year-olds – the adult children of seniors. Where they’re getting jobs, and where they’re getting the best-paying jobs, is an important consideration. Texas has been a job growth mecca in that regard.

Also, seniors often move because of lifestyle considerations. Maine, for example, is a high-growth state for seniors housing. Many seniors don’t get out that much, and they want to be in a comfortable and familiar setting, so coastal Maine is very popular.