Why Active Adult and Senior Housing Cap Rates are Resilient

Dan Lindberg
Sep 16
4 min read

TL;DR

Fed rate cuts in 2025 could lower borrowing costs and trigger new cap-rate compression.
Senior housing cap rates fell sharply in past easing cycles (2005, 2014–15).
COVID widened spreads: senior housing now trades >150 bps above multifamily.
Demographics and limited supply provide a strong demand cushion.
Elevated spreads signal both risk and opportunity for forward-looking investors.

The Fed has signaled its openness to cutting rates in 2025, despite elevated inflation, as downward revisions in job growth data indicate a slowing economy. For senior housing, this intersection of monetary policy and market fundamentals matters: capital costs remain elevated, but lower borrowing costs could catalyze another round of cap-rate compression. History shows the sector’s valuations are highly sensitive to these shifts. Irwin Levin Associates tracked a 140 bps decline in 2005 and an ~80 bps decline in 2014, both coinciding with periods of easier capital.

Aging demographics and a construction pipeline at recent lows provide a resilient backdrop; the real question for 2025 is not whether demand materializes, but which product types and markets can translate that demand into durable cash flows at today’s cost of capital. If rate cuts materialize, senior housing may again mirror the trajectory of yield tightening in multifamily, setting up opportunities for investors positioned ahead of the curve.

What drives senior housing cap rate resilience

Senior housing occupancy is rising. NIC cites Q1 2025 averages of 89% for independent living and 86% for assisted living.
Active adult communities are even tighter: 96% stabilized occupancy in Q1 2025.
Sharp demand-supply imbalance. 560,000 units needed by 2030 vs 191,000 likely in the pipeline, with construction starts at their lowest since 2009.

Costs climbed after 2019 - replacement values did, too

The hurdles the new supply must overcome are growing and buoy the value of stabilized assets, where replacement remains expensive.

Development costs have surged. CBRE data shows an 18% rise since 2020, with unit costs near $317K.
2025 continues to bring 4–6% annual construction cost increases.
Mid-level independent and assisted living pricing remains elevated.

Cap rates tell a consistent risk story

According to CBRE’s H1 2025 survey, active adult and senior housing earn higher cap rates than multifamily. Active adult communities average around a 6.4 percent cap in non-core markets. Independent and assisted living Class A assets in core markets now stand at approximately 7.0 percent, reflecting recent compression of 15-16 bps. In contrast, memory care remains elevated at 9.6 percent, the only segment showing a cap-rate increase. Meanwhile, core multifamily going-in cap rates averaged 4.8 percent in Q1 2025, with value-add properties slightly higher.

Spreads tell the fuller story

Cap rates are one part of the story. The 10-year Treasury yield allows us to compare against a risk-free return. From 2005 to 2019, the gap between senior housing and multifamily cap rates and the 10-year Treasury yield steadily narrowed as investors gained confidence in the sector, driving cap rates for independent and assisted living closer to those of apartments. This convergence reflected shrinking risk premiums and growing institutional acceptance of senior housing as a mainstream asset class. With COVID-19, occupancies plunged, costs rose, and capital retreated, pushing cap rates higher. The result is a widened spread of more than 150 basis points above that of multifamily. For investors, this widening signals both caution and opportunity: senior housing is currently priced as riskier, but for those bullish on demographic demand and a recovery in fundamentals, today’s elevated spreads offer the potential for outsized returns as the sector normalizes.

Comparison of senior housing and multifamily cap rates from 2005 - 2025 — Source: Anchor-year data from Levin Associates, NIC, CBRE, and Freddie Mac with interpolated estimates based on Treasury yields and documented cycle trends.

Across settings, yield cushions have narrowed since 2019, mainly because interest rates rose. In 2019, active adult led in spread advantage over Treasuries compared to independent living. By 2025, independent living edged ahead. Both saw cap-rate compression, but active adult fell by 20 bps, while independent living dropped by 15 bps, shrinking active adult’s prior edge. Given independent living’s stronger operational stability, higher occupancy, and institutional familiarity, investors targeted independent living more aggressively.

Comparisons to the 10-year Treasury (roughly 4.2% in 2025) are below:

Segment	2019 Spread	2025 Spread
Active Adult	+400 bps	+150 bps
Independent Living	+340 bps	+160 bps
Assisted Living	+410 bps	+220–280 bps
Memory Care	+500 bps	+340 bps
Multifamily	+300 bps	+60 bps

Turning market dynamics into strategy

For developers:

Focus on lower-complexity product types. Active adult and independent living avoid the heavier construction and regulation of assisted living and memory care.
Exploit replacement-cost gaps by prioritizing acquisition or expansion where current replacement costs exceed acquisition pricing.
Phase developments to align with the tightening supply and absorb demand effectively.

For investors:

Balance yield vs operational complexity. Active adult and independent living offer stable rent-driven income. Assisted living and memory care offer higher yield but need operational rigor.
Think regionally. Sunbelt locations may provide higher entry yields, while coastal markets offer steadier, albeit lower, returns.
Capitalize on further cap-rate compression, particularly in independent living where institutional demand is strongest.

For operators:

Prioritize workforce stability. Labor is the leading operational cost, particularly in assisted living and memory care.
Use pricing discipline to leverage lower new supply. Rents have increased 3-7% in many segments.
Differentiate through resident experience: hospitality in active adult and independent living, trusted care in assisted living and memory care.

The bottom line

Senior housing isn’t recession-proof, but its structural fundamentals are resilient. Even as interest rates have tightened absolute spreads, the sector still offers a meaningful yield premium over multifamily. Investors and developers should focus on product types and markets where supply constraints, operational clarity, and demographic tailwinds align.