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CCRC/Seniors Housing Outlook 2014

Using characterizations, 2013 was a year of gradual ascent for the industry but not necessarily, uniformly so.  After a series of years preceding classified as industry malaise, occupancy began to trend forward and absorption rates stabilize.  Industry wide, overall occupancy is hovering around 90% for CCRCs though again, this number is broadly misleading.  Non-profit CCRCs, the bulk of the industry, fell-off slower and less dramatic and thus today, have risen back in generalized occupancy above 90%.  For-profits, fewer in number and newer in market, remain below 90% in overall occupancy (88%).  Interesting to note is that the bulk of non-profit CCRCs are entrance fee communities whereas the for profit variety trend toward rental models.

The question for 2014 is will a growth trend emerge?  My answer is “no” but the tide will remain somewhat positive.  What needs expansion is the following;

  • CCRCs and Seniors Housing is very local and regional.  Effectively, market dynamics at the local and regional level will play more directly than national trends.  As each economic region and market have recovered differently and are pacing recovery differently, so are the prospects for Seniors Housing.
  • The real estate market, while better, remains vulnerable nationally and moreover, regionally.  Some regions and municipal areas have rebounded nicely and days on market have returned to historic lows (averages) and prices, increased to pre-recession levels.  Conversely, other regions remain stuck or have only marginally rebounded (the Detroit area, portions of Chicago are current examples).  For true CCRC prosperity to return, the residential real estate market must continue to strengthen.
  • The overall economy is still mired close to neutral.  Job gains are somewhat phantom and Labor Department unemployment numbers a misleading gauge.  The job gains made are not career oriented jobs with moderate to high wages and solid benefit packages.  The gains are part-time, lower wage, service sector and seasonal/temporary work.  The overall participation rate remains at 40 year lows (fewer numbers) and the long-term unemployment number, grudgingly high.  Inflation remains low and accommodative monetary policy has suppressed fixed income yields at record lows.  Essentially, this means price inflation remains checked, even for seniors housing.  With seniors feeling the pinch of income suppression (low social security increases, low fixed income returns, etc.), the income component of the rent equation remains compressed.
  • Available product in many markets is still fairly high.  While new projects are coming on, the rate is still slow and recent upticks in financing costs have changed the capital components on project cost.  Recall that in April of 2013, unrated and rated tax exempt debt  was at record lows and volume in terms of issuance on the uptick.  Essentially, demand was equal to and often greater, than supply.  Nine months later, the cost in terms of interest is 25 to 50% higher across all rated  and unrated categories  with new project/new campus debt cost today hovering around 8.5%.  Though capital markets remain relatively fluid for projects, the costs today have moved high enough to re-shape new product entries in terms of timing and scope.  Similarly, the fluidity that does exist is subject to short-term volatility as Fed policy (the degree of tapering), global shifts in monetary fortunes via emerging market currency valuation changes (a far lengthier discussion is warranted for this but not now), and the fixed income bias to “short” duration (fearful of upward rate volatility) shifts liquidity and funding dynamics.

Given the above, my outlook is good but not great.  I see continued occupancy improvements but incrementally.  I also see continued regional struggles as some locations are just not in recovery mode.  I see enough volatility economically to keep things moving cautiously forward.  Similarly, the same volatility can rear a period of distraction and even retrenchment, though I think such a period is brief.  Projects will emerge cautiously and then again, given funding dynamics, will evaporate and re-scale.  I think the wholesale raft of tax exempt debt refinancings will cool substantially as the cost of a refunding without enough interest savings has narrowed or tipped, especially for less than A rated credit. I think price compression will continue as rates will remain suppressed by fixed income fortunes and low inflation.  Revenue improvements will continue to come from rising occupancy and improved operational efficiencies though the latter is probably, mostly wrung out.

Non-profits will continue to out perform for-profits in most markets if for no other reason than their time in-market.  For consumers, these sponsors and projects have been around long enough to garner trust and build reputational stability.  This isn’t to say that for profits can’t succeed and many will but as a generalized industry trend, the non profits are ahead of the curve.  This gap however, will narrow if and when, the industry fully rebounds.  A challenge for non-profits is that while they lead in reputational time in-market, they do so often with older physical plants.

Where vulnerability for organizations remains is at the capital structure level.  I still see a tough year with a continued high volume of technical covenant defaults (usually liquidity covenants).  Rate compression and the inability to pass along too much rate inflation (if any at all) coupled with occupancy challenges was the driver in 2013 and will continue to 2014.  We saw some salvation with low rate refinancings but that window has closed for the majority.  The key solution for most is recovering occupancy and for some, this will remain difficult given regional economic challenges.  What I do know however, is creativity in solutions and positioning is key and will continue to be so for at least 2014.

A key element for all providers that seems missed to me in numerous discussions is the true demographic picture and thus demand equation within the market.  For lack of a better term (or terms), I call this the Baby Boom Fallacy.  Too many developers and providers have reached the conclusion that the market is rich with and growing exponentially because of Baby Boomers.  In reality, nothing is further from the truth today, and for the next number of years.  The true baby boom period is 1947 to 1963.  This means that the oldest Boomers are just above 65 (67 to 68).  Using the real age math for seniors housing and CCRCs in terms of average age of initial occupancy (non-hybrid projects like Del Webb communities aise) at 80, the impact of the Boomers is still a decade away.  Their impact today is as adult children and influencers of the current resident prospects; not prospects themselves.

The current resident demographic demand is the baby bust generation or war babies.  The World War II era babies are part of time where birth rates declined due to depression recovery and the war.  The target range lies within the group born between 1930 and 1943 – pre Baby Boom.  This period in time is more bust than boom in terms of numbers.  The shift in numbers evident within this group (today) over prior periods is evolutionary due to survival, not due to birth rate.  There are more of these 75 plus folks than ever before solely due to increased life expectancy; nothing more.  Targeting this group, their cultural norms and their experiences (social, economic, etc.) is where marketing and planning should be – not focused on Boomers.  The Boomers, contrary to rhetoric, aren’t here yet as the consumer.

January 28, 2014 Posted by | Senior Housing | , , , , , , , | Leave a comment