Eight real estate investment trusts (REITs) competed for a 166-unit senior living community in Texas in October 2025, pushing the deal to a cap rate that breaks with standard underwriting practices. Robert Wall, Managing Partner at Verdot Capital, says institutional buyers ignored the property’s trailing twelve-month financials and instead bid based on projected future income. Limited supply is driving buyers to overlook traditional risk metrics.
“They weren’t even looking at the trailing twelve months,” Wall says. “Everybody was looking at your forecasted next 12 months, and where you are right now.”
Had the transaction been valued using actual trailing income, Wall notes, the cap rate would have been 5.14% — a level he describes as unsustainable for underwriting new construction. This was not an isolated case. REITs are aggressively competing for senior housing properties less than ten years old, and the lack of new inventory is forcing buyers to pay prices that would not work for development deals.
Senior Housing Supply Nears Historic Lows
Senior housing occupancy rates have reached approximately 90% nationwide, the highest ever recorded, according to Wall. The sector — which includes independent living, assisted living, and memory care — is seeing demand outpace supply across all categories. Wall attributes the current shortage to a multi-year pause in development that began during the COVID-19 pandemic and has continued through 2025.
“There’s nothing new out there,” Wall says. “Our products are 2021 and 2023, and there’s nothing close to us that is brand new and offers all the latest amenities.”
Verdot Capital develops and owns properties in Minnesota, Texas, and Oregon, and is evaluating projects in Arizona, Colorado, Utah, and Idaho. Wall says the supply-demand imbalance is consistent across all regions. Properties that are relatively new command premium prices because institutional buyers have few alternatives when seeking stabilized assets.
Scarcity is also fueling significant rent growth. Wall reports that Verdot is raising rents 8% to 10% annually across its senior housing portfolio, well above increases seen in other commercial real estate sectors. Wall attributes this to the lack of new competition and the growing population of older adults.
REITs Pivot Toward New Development
With few existing senior housing assets available, institutional capital is shifting toward new development — a notable change in strategy. Historically, REITs have avoided development risk in senior housing, preferring to acquire stabilized properties. The scarcity of available assets and high prices for existing properties are forcing a new approach.
“Every single REIT I know of is moving into development because they can’t find acquisitions, and there’s so much competition when something is built,” Wall says.
Wall points to Welltower, Healthcare Realty Trust, and National Health Investors as examples of REITs now taking on development risk. As large players move into development, he expects smaller equity sources — including limited partner (LP) capital — to follow. LP equity has been largely absent from senior housing development for the last two and a half years. Wall anticipates its return as REITs demonstrate the viability of new projects.
If REITs and other institutional investors begin building at scale, the current supply shortage could ease within three to five years. Wall cautions that development timelines are long, and the near-term outlook remains one of limited supply and elevated rents.
Labor Costs Threaten Operating Margins
Wall identifies labor as the main long-term risk to senior housing operating margins. Labor typically accounts for 25% to 50% of total expenses, depending on the level of care provided. Independent living communities carry lower labor costs, while high-acuity memory care facilities can see labor costs reach half of total expenses.
“If that one line item moves 10% because wages jump, that really messes up valuation, and projects stop penciling if they’re not already under construction,” Wall says.
Labor cost growth has stabilized in recent years. Wall expects wage pressure to rise over the next decade, particularly in healthcare and caregiving roles. Operators who manage labor costs more effectively than competitors will hold a clear advantage as wage growth resumes.
Wall does not view labor as an immediate threat. The combination of supply constraints and strong rent growth allows operators to absorb moderate cost increases. Maintaining profitability, however, will require investment in labor efficiency and technology as wage pressure builds.
Verdot Targets Long-Term Development Holds
Verdot Capital develops and owns build-to-rent multifamily and senior housing, with senior housing making up 40% to 50% of its portfolio. The firm targets markets with strong demographic demand and limited new supply. Wall says Verdot underwrites exit cap rates at 6.5% for new development, even though recent transactions suggest cap rates could compress by another 50 basis points.
The firm’s strategy prioritizes long-term holds over quick sales, though the October 2025 transaction was executed to test market pricing. The sale confirmed that institutional buyers are willing to pay above Verdot’s internal valuations — a factor that will influence how the firm underwrites future projects.
Wall believes the senior housing market is entering a period where development economics will improve as institutional capital grows more comfortable with construction risk. If REITs continue to pursue development and LP equity returns, the sector could see a surge of new supply in the latter half of the decade. For now, the market is defined by scarcity, rapid rent growth, and cap rates based on projected demand rather than historical performance.
