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How Long Can Senior Housing Rental Rate Increases be Sustained?

Updated: 7 days ago

CBRE reports that, according to an April 2025 report, senior housing capitalization rates (or cap rates) fell by 12 basis points over the last six months, down from a 10-year high in 2024. A cap rate is calculated by dividing net operating income by asset value and is a helpful metric for valuing and assessing real estate transactions. Cap rates are compressing due to supply constraints following the recovery of occupancies from the pandemic. Increased investor interest drives cap rates lower.

One implication of cap rate compression is that an asset’s acquisition price increases relative to the net income it generates. Pricier assets must generate a sustainable return, so the sector has looked to resident rental rate growth. Nearly 57% of CBRE’s survey respondents expect rental rate increases of 3-7% over the next year.

Since pent-up demand, inflation, and limited new supply have been driving up senior housing rental rates over the last couple of years, the survey made me wonder. Just how much longer can rental rate increases be sustained? What evidence is there for sustaining rate increases above and beyond inflation adjustments?


What is the Evidence For and Against Senior Housing Rate Increases?


The case for sustained rental rate increases:

  • Demographic Tailwinds: The most compelling argument for sustained rental rate increases lies in unprecedented demographic shifts. Aging population dynamics are particularly favorable, with the first Baby Boomers turning 80 in 2025. This population is expected to grow by 55% by 2035.

  • Limited New Supply: New senior housing construction is at its lowest level since 2013.

  • Strong Market Fundamentals: In 1Q2025, senior housing occupancy rose to 87.4%, marking three consecutive years of absorption growth. Investment interest remains robust, with senior housing ranked second only to data centers in projected risk-adjusted returns over the next three years.


The case against sustained rental rate increases:

  • Elastic Demand: Senior housing demand is a price-elastic, luxury good, meaning a price increase induces a demand drop that is more than proportional. Rental rate increases would have to be justified with a corresponding increase in services.

  • Labor Cost Pressures: Labor shortages and productivity concerns suggest that rate increases will protect margins instead of driving profitability growth.

  • Market Penetration: Despite the demographic tailwinds, senior housing remains a competitive sector and is nearing saturation in some markets. Older adults have various options available to meet their aging needs and lifestyle preferences.

  • Economic Uncertainty: Tariff-driven increases in imported material costs drive up construction costs, while immigration-related labor policies may exacerbate staffing shortages. Recent increases in inflation, driven by labor shortages, supply chain disruptions, and higher property insurance costs, continue to impact operations. With $10 - $14 billion in loans reaching maturity in 2025, refinancing presents unique challenges.


Are Senior Housing Rental Rate Increases Justified?


Rate sustainability hinges on an operator’s ability to tailor services to local demand while managing margin pressures. In high-barrier-to-entry markets with aging demographics and limited competition, annual increases in 7%+ range may be justified in the short run. But across the board, success will depend less on pushing rates and more on offering differentiated value, whether through health partnerships, resident programming, or efficient staffing models. A nuanced, data-driven approach to pricing, sensitive to both

demand elasticity and capital constraints, will be essential.

2 by 2 matrix depicting Demographic Tailwinds Verticial from Weak at the bottom to Strong at the top and Market Competition from Low at the left to High and the right.

As value-based care incentives continue to evolve, rental rates may increasingly reflect bundled health care offerings. Over the next 5 - 10 years, operators who can quantify and deliver health-related ROI (e.g., lower hospitalizations) may command premium rates. Cap rates may begin to reflect this operational differentiation.


Evaluate Rental Rate Risks with our Guide Below


Assess the sustainability of senior housing rental rate increases for your properties and markets. Download our complimentary guide.



Dan Lindberg is the founder and principal of Applied Economic Insight ® LLC.



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