The Housing Market and CCRC Prospects: What Each Means to the Other
It has been a world-wind few days (make that a week) analyzing all that is or was, health care reform. In some respects, I’m glad that the meat of health care reform is done for now though admittedly, I’m disappointed at the outcome. Suffice to say, I will catch-up on the ramifications of the legislation and the reconciliation package for providers over the course of the next few days. For now however, I need to re-focus on the subject matter pile that is building within my e-mails and my files.
An issue that has drawn a great deal of attention lately is the future and current prospects for CCRCs (Continuing Care Retirement Communities). As I wrote in earlier posts, the CCRC industry was perhaps, the hardest hit by the recent and continuing economic downturn, although not necessarily as bad as some would think. Two highly visible restructurings/bankruptcies involving Erickson and Sunwest placed caution in the minds of the rating agencies and as a result, the analysts at Fitch for example, issued a “negative outlook” for the industry. At the crux of Fitch’s outlook is the dismal residential real estate market performance, the lackluster economy and slow-recovering investment markets (the latter less of an issue today). Correctly, Fitch points out that declines in its CCRC rated borrowers’ financial condition in terms of liquidity and profitability are contributing factors to their negative outlook but they seem to view these conditions as symptoms of the economy rather than tell-tale signs of an exhausted industry.
As I take a close look at the industry and at the comments from Fitch, et. al., it is easy to see how a dim or less than optimistic view can occur. Specifically, here’s what I mean and moreover, why I think there is room for a tad more optimism until one focuses acutely on the real estate market itself.
- The CCRCs that are struggling and those that have gone through highly publicized restructurings, etc. are truly isolated and reflective principally of highly leveraged, aggressively expanded organizations with many unstabilized projects and projects under development. Unstabilized projects and new, in-development projects have unquestionably suffered the most although, some have done fine when they are located in areas or markets that remained more stable during the economic downturn (parts of Texas for example).
- Occupancy dipped a tad as a general condition in 2009 but again, for stabilized operators, not as bad. In fact, the majority of the declines averaged 3.5% to 5% and some operators in good locations, saw virtually no declines, even in projects with 95% to 100% occupancy levels.
- Occupancy dips, such that they were or are combined with price suppression (down economies require providers to hold the line on price increases) and sagging investment values are the cause for the lower liquidity and profitability levels that Fitch reports. The latter two don’t have me terribly concerned as most stabilized and solid operators can handle the modest, temporary price suppression and the once sagging investments should be on much better footing by now as a result of recent improvements in the investment markets.
The residential real estate market is proving to be the biggest lag on CCRC industry performance and unfortunately, I don’t see a lot of cause for optimism that recovery in real estate is near. As much as I am a proponent of creative, strategic marketing for CCRCs as a means of boosting and maintaining occupancy, if a prospective senior can’t sell his/her home or worse, can only do so at a severe discount to value, demand for units and occupancy won’t realistically improve. Entry fee CCRCs will face this predicament in far greater numbers than rental only CCRCs, though rental-based projects will still see some of the same issues. As CCRCs predominantly attract transitioning seniors, those moving from one residential, owner occupied setting to another complimentary setting (CCRC), real estate sales are a significant part of the transition. In short, a lackluster or illiquid residential housing market effectively suppresses the current demand for CCRCs on the part of seniors.
Unfortunately, what I am seeing now in the immediate and near-term outlook for the residential real estate market, particularly for existing home sale prospects, is not encouraging. In January, existing home sales declined by 7.2% over January. This in and of itself is not hard to understand as the November to early December period was a high month for closings due to the expected end of government tax-credits for new home and replacement home buyers. Congress extend the credits through May but the extension occurred a bit too late to match the demand fall-off. The news or trend that is disconcerting in “what” volume is making up the sales and at “what” prices.
More than a third of all current sales are distressed or foreclosed properties and as a result, median sale prices in most markets continue to fall. For a CCRC, the typical prospect is not likely to live in a distressed or foreclosed property and, since the homestead is a significant portion of the prospect’s estate, not as willing to drop the home selling price to match the declining market values. In other words, depressed values and selling prices combined with a great amount of “bargain” inventory means that the senior citizen prospect for the CCRC isn’t likely to sell his or her home in the near future (not enough traffic across all of the inventory options and a seller unwilling or not needing to lower his/her price to match the market price points).
For the balance of the year, especially across the prime sales months of April through September, I expect to see the following occur.
- A gradual increase in sales volume starting now and stabilizing through May – the end of the tax credit extension. April and May should be the heaviest volume months in the first half of the year.
- Average sales prices will continue to decline in the West, South and Midwest regions. Prices seemed to have stabilized and are actually rising every so slightly in the Northeast and in the Northwest. The majority of the suppression on average sale price will continue to come from foreclosures.
- Foreclosures will stay at their current pace for at least the next two quarters, perhaps even to year end. As a result, average prices will remain suppressed as foreclosure sales and distressed sales pull the selling prices down and require sellers to drop asking prices to points or levels proximal to the values of like properties being sold; a dismal trend for seniors wishing to sell a home to move into a CCRC.
- Individual markets and regions will out-perform the nation as a whole but these markets will remain few in number and despite performing better than the national averages, their performance still isn’t great. Examples include Charlotte, NC, Boston, MA, Denver CO, and San Diego and San Francisco, CA. Larger market areas that are performing better can be found in Virginia (D.C. areas), Austin and Dallas Texas areas and the Golden Triangle areas in North Carolina. CCRCs in these areas will find a bit more “rosier” outlooks for converting side-lined prospects to residents in 2010.
- The wild-card for faster more more steady improvement in the residential real estate market is jobs. Improving employment will help to stabilize the real estate market, reduce foreclosures, allow prices to trend back-up slowly and spur more home-buying. As I see only gradual and slow job recovery prospects for the balance of 2010, the spill-over to residential real estate won’t logically occur until months after. Job growth needs to filter to job stability for major investment (consumption) activity to heat back up (there is always a lag).
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