Alternative lenders such as Locust Point Capital are filling the financing gaps left by traditional lenders and addressing the unique needs of the senior housing sector
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In my view, investing in the senior housing sector is a prime opportunity to tap into powerful demographic shifts. The US population aged 85 and older is set to nearly triple from 6.5 million in 2020 to an estimated 13.7 million by 2040, largely driven by the aging baby boomer generation. With around 70% of people turning 65 expected to need long-term care services at some point during their lifetime, there’s a stable demand for senior housing for the foreseeable future.
But even with this clear growth trajectory, the sector is significantly undersupplied. By 2030, an additional 755,000 units will be required to meet the needs of this aging population.1 Construction starts, however, are lagging, with only 23,897 new units in 2022 and just 13,322 in 2023.2
Our view is that this significant drop off in construction starts is primarily the result of the contracting capital markets. This supply-demand imbalance suggests existing facilities will see high occupancy rates, creating substantial room for growth in new developments.
Additionally, the senior housing sector is highly fragmented, with nearly 73% of facilities owned by operators that manage less than 25 facilities.3 Many of these facilities were built before 2010, and some as far back as the 1960s, highlighting the need for redevelopment.
Overall, we believe that the senior housing sector can be a strong foundation for long-term investment. We’re looking at compelling demographic trends, a clear undersupply, and a market that’s primed for growth. For investors, it’s a resilient, needs-driven sector with solid potential for both returns and sustained demand well into the future.
The senior housing sector is distinct because it blends both real estate and corporate lending elements, as financing typically supports not only the property itself but also the business operations that provide essential healthcare services to elderly residents.
Most traditional lenders keep their real estate and corporate credit divisions separate, with very little crossover. But senior housing requires expertise in both areas, which can make it challenging for conventional lenders to fully meet the sector’s demands.
Financing these projects also means navigating a range of operational complexities, including projecting occupancy, Medicaid and Medicare reimbursements, and strict regulatory compliance. These factors can vary significantly from state to state and often call for customized financing solutions that accommodate the extended timelines needed to stabilize assets.
Traditional bank products tend to be standardized, so they generally lack the flexibility to address these unique nuances. Plus, regulatory constraints often make banks more risk-averse, limiting their willingness to lend to sectors with such complex operational factors.
This is where alternative lenders, such as Locust Point Capital, can add value. With a deep understanding of the senior housing sector, we’re able to provide tailored financing solutions that meet the specific challenges of the sector.
As a non-bank lender, we can structure financing that addresses the full range of capital needs, from senior debt to mezzanine financing and preferred equity. Our loan structures are designed to fit the cash flows of the facilities we are financing. For instance, we often provide bridge loans that enable operators to stabilize their assets before transitioning to permanent financing through programs like Fannie Mae, Freddie Mac, or the US Department of Housing and Urban Development.
We are also able to structure deals that align with the realities of the senior housing market – whether that means extended lease-up periods or fluctuating occupancy rates. We combine this adaptability with deep industry knowledge, which allows us to underwrite loans with a clear understanding of the sector’s specific risks and opportunities. As a result, we’re able to serve as a true strategic partner, offering not just capital but also insights and support to help our borrowers succeed.
To fully grasp the impact of rising rates, you have to look back to the pre-COVID environment. Before 2020, traditional lenders such as banks dominated the financing landscape for senior housing, providing most of the capital for development and acquisitions. Back then, with low borrowing costs, banks offered highly competitive terms and were the primary source of financing in the sector.4
By early 2022, however, the industry was still dealing with the lingering effects of COVID and inflation. The pandemic caused a major drop in occupancy across the board, and inflation-driven cost pressures have only further squeezed operating margins and affected overall performance.5
As rates began to rise, the cost of capital surged, putting pressure on loan covenants. Banks responded by tightening their underwriting criteria, and many simply pulled back from the sector as challenges emerged within their commercial real estate portfolios which impacted their ability to originate new commercial loans.
The higher rates also created significant refinancing challenges. Loans that were initially issued at near-zero interest rates suddenly couldn’t be refinanced at maturity without major rebalancing, forcing many borrowers to negotiate extensions. With fewer refinancings, banks’ balance sheets became more constrained, reducing their capacity to issue new loans and tighten capital availability across all commercial real estate. This shift revealed a gap in the financing landscape. Higher borrowing costs and stricter lending terms made it tough for traditional lenders to meet the unique needs of the senior housing sector. Alternative lenders, such as Locust Point Capital, can offer much-needed capital tailored to the sector’s specific requirements environment.
Moving forward, with rate cuts on the horizon, we might see traditional banks becoming more active again as the cost of capital goes down. However, this won’t necessarily end the ‘golden era’ of private credit – especially in sectors like senior housing. In our experience, both institutional investors and borrowers have come to value customized financing solutions that traditional banks often can’t match.
There’s still a strong demand for specialized, strategic capital, and alternative lenders will keep playing an essential role in sectors such as senior housing. In these areas, traditional lenders often aren’t equipped to meet the nuanced financing needs. We foresee private credit remaining a critical part of the landscape, supporting growth in industries where tailored financing is key
1 NIC MAP® VISION: Senior Housing Market Outlook, Opportunities from a supply and demand imbalance 2024
2 NIC MAP® Data Service, powered by NIC MAP Vision | NIC MAP Construction Starts Trends 1Q2024 | All Markets
3 NIC Investment Guide Sixth Edition (data as of 2019)
4 NIC Investment Guide Sixth Edition (data as of 2019) (page 79)
5 NIC MAP® VISION: Senior Housing Market Outlook, Opportunities from a supply and demand imbalance 2024 (pages 5–9)
About
Eric Smith is the CEO and Co-Founder of Locust Point Capital, a boutique asset management firm specializing in the US senior housing sector. Under his leadership, Locust Point Capital has become a prominent lower mid-market lender, providing tailored financing solutions that drive the growth of senior living communities across the US. Since co-founding the firm, Eric has been instrumental in defining its investment strategy and building its reputation as a trusted partner for operators and investors alike.
This article originally appeared in Preqin 2025 Global Report: Real Estate. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Locust Point Capital accept no liability for any decisions taken in relation to the above.