The Opportunity Behind the Cap Rate

Why basis, operating complexity and patient capital must be underwritten together.

A cap rate can tell us a great deal about how the market perceives an asset. It cannot tell us whether the market is right.

That distinction matters in senior housing, where the value of the real estate and the performance of the operating business are unusually intertwined. Much of institutional capital naturally gravitates toward newer communities, larger metropolitan areas, strong in-place performance and assets where the investment story is relatively easy to explain. There is good reason for that approach.

But there is another part of the market worth examining: secondary and tertiary markets, older communities with sound physical plants, and properties where current cash flow comes with operating or physical complexity. These opportunities do not always present neatly in an investment committee memorandum. The building may need capital, occupancy may be below its potential, and stabilization may require considerably more than changing ownership or putting a new sign out front.

The higher cap rate may reflect legitimate problems. The more important question is whether those problems represent permanent impairment or solvable complexity.

That is where the real opportunity begins.

What Is the Market Pricing?

Senior housing cap rates vary considerably by asset quality, care type and market. In its H1 2026 Senior Living & Care Investor Survey, Cushman & Wakefield reported average cap rates of 6.6% for Class A assisted living in primary markets and 8.2% for Class A memory care. For Class C communities in secondary markets, those averages increased to 8.6% for assisted living and 9.9% for memory care.

The spread is not simply an inefficiency waiting for an investor to capture. It reflects how the market prices physical condition, location, care complexity, operating performance, future capital needs and perceived risk. A 9% or 10% cap rate is therefore not automatically a bargain. The market rarely provides additional yield without a reason.

The better questions are more difficult. Why is the property being priced this way? What is actually driving the current performance? Is the problem structural or operational, and do we understand it well enough to solve it?

That is where senior housing underwriting begins to separate itself from traditional real estate underwriting. A financial model can tell us what a property is producing. Operating experience helps us understand why.

A community with weak NOI because sustainable demand does not exist is fundamentally different from one underperforming because occupancy has declined, the sales process has deteriorated, leadership is unstable, labor is poorly managed or the physical plant has been neglected. The numbers may look similar. The underlying investment is not.

An attractive acquisition basis cannot rescue a bad operating thesis. The reverse is also true. An asset that appears excessively complicated to a purely financial buyer may look very different to someone who understands what is happening inside the community, what correcting it will cost and how long the work will realistically take.

That is where I believe some of the better opportunities can be found: when the market has priced solvable complexity as though it were permanent impairment.

Basis Is Part of the Operating Strategy

This becomes particularly important when considering affordability. Senior housing affordability is usually discussed in terms of monthly rents, but the economics begin much earlier, with the cost of the real estate and the capital structure supporting it.

If we overpay for an acquisition, overbuild the amenity package or assume future operating performance will somehow compensate for an aggressive basis, much of our flexibility has already disappeared. The margin for error is often created when the property is purchased.

Replacement costs reinforce the point. CBRE reported average senior housing development costs of approximately $388,830 per revenue unit during the second quarter of 2026. At that basis, the rents required to cover construction, financing and return expectations are largely established before the first resident moves into the building.

This is not an argument for simply buying inexpensive real estate. Cheap real estate can be very expensive if the operating problem cannot be solved. The objective is to establish a basis that reflects the actual condition of the property, the capital still required, the operating risk being assumed and the economic capacity of the local market.

I would rather own the right building at the right basis than the prettiest building at the wrong basis.

Apartments can be renovated, dining and common spaces can be improved, landscaping can be restored, sales cultures can be rebuilt, leadership can be strengthened and deferred maintenance can be addressed. In some situations, an owner may also be able to add units, cottages or another level of care and improve the economics of an entire campus.

What is much harder to repair is an acquisition price that assumed perfection from the beginning.

Secondary Does Not Mean Weak

The same discipline applies to market selection. Secondary and tertiary markets are often grouped together as though smaller automatically means weaker. Sometimes that conclusion is correct. A market may lack sufficient demand, workforce depth or economic capacity to support the investment.

But sometimes the label tells us more about institutional preference than conditions on the ground.

NIC reported that senior housing occupancy across 68 secondary markets reached 90.0% in the fourth quarter of 2025, slightly higher than the 89.1% reported in primary markets. Both groups were also experiencing historically low inventory growth. Those figures do not make every secondary market attractive, but they do reinforce an important point: the words primary and secondary should never substitute for underwriting.

Local analysis has to go deeper. Workforce availability, local wages, competing supply, referral relationships, housing wealth, healthcare infrastructure, family dynamics and the ability of residents to pay for care all matter. Demographic growth alone does not answer those questions.

Workforce may be the most important of them. Labor was identified as the leading valuation risk by 37% of respondents in Cushman & Wakefield's 2026 survey, while NIC separately estimates that senior housing and care will need approximately 660,000 additional workers across four core occupations by 2033.

A market can have older adults, limited new supply and an attractive acquisition basis and still fail if the operator cannot recruit and retain enough people to serve residents well. Demand may get us into the market, but workforce determines whether we can execute there.

Operations Have to Create the Return

A higher cap rate should never become a substitute for operating discipline. I am much more comfortable underwriting value we can create than assuming the capital markets will eventually create it for us.

If a community is acquired at the right basis and NOI improves through occupancy, revenue management, labor discipline, stronger leadership, physical improvements and better execution, value has been created through factors the owner and operator can influence. If cap rates later compress, that becomes additional upside rather than the foundation of the original thesis.

CBRE's H1 2026 Senior Housing & Care Investor Survey found that 59% of respondents expected cap rates to compress during the following 12 months. They may be right, but an expectation is not an operating strategy. The investment should still make sense if another buyer is not willing to pay a substantially higher multiple several years from now.

That puts the burden where it belongs: on execution.

Capital Has to Be Patient Enough for the Work

Senior housing also operates on a different timetable from many traditional real estate investments. Turnarounds take time because a damaged reputation has to be repaired, teams have to be rebuilt, sales pipelines need to recover, occupancy grows one resident at a time, and capital projects often have to be completed while the community remains fully operational.

NIC's research on new-community lease-up has found that stabilization frequently emerges during the third or fourth year. A turnaround acquisition is not the same as a new development, but the operating lesson is similar: meaningful change usually unfolds over years, not quarters.

That creates tension when the business plan requires patience but the capital structure has a predetermined exit clock. Long-duration capital can behave differently because it can stabilize an asset, refinance it and continue holding when continued ownership makes economic sense. It can make decisions based on the long-term health of the real estate and operating business rather than an approaching fund maturity date.

That does not make one form of capital inherently better than another. Different capital has different objectives. The issue is alignment, and the duration and expectations of the capital should fit the operating strategy from the beginning.

A Final Thought

The cap rate is rarely the opportunity. It tells us how the market is pricing the opportunity.

The harder work is determining whether the risk embedded in that price represents something permanent or something that can be corrected through capital, time and operating execution.

I believe some of the more compelling senior housing opportunities over the next several years will be found in that distinction. They will not necessarily be the newest communities or the properties in the largest metropolitan areas, and they will not be found simply by chasing the highest cap rate.

They are more likely to be found where the basis makes sense, local demand is real, the workforce can support the operation, the physical plant fits the strategy and the capital has enough patience to allow experienced operators to do the work.

The cap rate may tell us where to look. Operations will tell us whether there is actually an opportunity.

Sources and Further Reading

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About the Author

Tod Petty serves as Chief Investment Officer at Mainstay Financial Services and Mainstay Senior Living. Drawing on more than two decades of experience as a president, COO, CEO and chief investment officer, he writes about the intersection of capital, operations, leadership and strategy in senior housing and healthcare real estate.

Editorial Disclaimer: This article presents opinion and industry analysis informed by the author's experience in senior housing operations and real estate investment. Industry data and third-party publications are cited for context. Nothing in this article constitutes an offer to sell or a solicitation of an offer to purchase any security.