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Senior Housing Update – Q1

The first quarter is now in the books (so to speak) and the trend for senior housing remains about the same, a little better but not back to pre-pandemic levels. With a softening real estate market principally due to low inventory levels and high interest rates (by comparison to the past ten years), we are likely to continue to see slow occupancy increases in Independent Living in most markets. Fortunately, for existing operators, the cost of new development coupled with high costs of capital has slowed inventory growth. Without a bunch of new product in many markets, absorption of existing inventory has a chance to impact occupancy, positively so.

Per NIC (National Investment Center), first quarter occupancy ticked-up for all product types (IL, AL, and SNF) with the industry as a whole seeing a modest increase to 83.2% – up 30 basis points. IL occupancy remains the strongest at 85.2% while AL and SNF, slightly improved, still remain at 81%. For SNFs, this may be less of a problem as staffing challenges remain and occupancy is less critical than the quality (payer) mix of the occupied beds. In other words, if I have a 100 bed SNF, and 80 beds are occupied but 60 out of the 80 are occupied by Medicare payers and insurance/private pay, I am less adversely impacted by a lower census revenue-wise than if 90 of my beds were occupied but 70 of the 90 residents were Medicaid payers. Similarly, with staff challenges (numbers), I may be better off having fewer beds occupied if the same can be efficiently and safely staffed. Here is the first quarter NIC report: 1Q23-NIC-MAP-Market-Fundamentals-PDF

Overall, occupancies lag the pre-pandemic levels by about 5 points.  IL was running right around 90% at the start of 2020.  As I mentioned earlier, new starts are down and thus, absorption is improving.  Rent growth has been decent and necessary as costs continue to grow due to inflation.  I am a bit concerned however, that rent growth is below generalize wage inflation and supplies inflation, particularly food.  Utility increases are also higher than rent growth.  With slightly depressed occupancy, margin compression is quite possible if not inevitable for 2023 for IL (primary) facilities.  Rent increases would need to be above 6% to offset internal cost escalation for most providers.

Looking back to the 2008 t0 2010 recession period, the real estate dynamics in a lot of markets significantly impacted senior housing, especially above-market IL projects and Life Plan communities with entry fee pricing models. The primary source of the entry fee payment is the net proceeds from a senior’s sale of his/her principal residence.  If resales become difficult or stagnant because of high borrowing rates, the liquidity (such that it is) of real estate sales adversely impacts the ability of the senior to “make the move”.  For sure, the economics are different today than they were in 2008 to 2010 but, how the residential real estate market fairs over the next year or so will impact, additional occupancy gains for IL housing, especially above market projects and entry fee projects.  

  • Real estate demand is highly elastic such that price and cost moves, impact demand significantly.  With higher interest rates, even with compressed residential real estate inventory (new and existing) in many markets, demand will soften as buyers are priced-out of the market.
  • There is likely less inventory coming to market in the next twelve to twenty-four months.  We’ve had historically low interest rates for a long period of time (until recent).  A portion of inventory available for sale in any given market comes from people who sell their home in order to move-up to a different (usually larger) home.  If the current owner has a 2 to 3% fixed mortgage and getting a new home requires financing at today’s rates (6 to 7%), the current owner is unlikely to move or, will only do so if he/she can extract enough value (equity) from the current residence to reduce the next home mortgage level to a comparable payment level (even with higher interest cost, the balanced financed is less). Simply put, there are lots of current homeowners that took advantage of historically low interest costs either via purchase or refinance and are unlikely, to move into another home if doing some comes with a mortgage cost twice or more, than their current mortgage. A de facto inventory suppression is occurring due to this rate/borrowing cost scenario.
  • The good news is that there still is enough demand for any decent properties and enough buyers with capital and access to financing, that price suppression of residential housing is minimal, so far.  I’ve noticed some suppression but in reality, prices are holding up quite well.
  • Real estate is local, and no two markets will experience the same supply/demand dynamics.  Some markets had little negative impact in 2008 to 2010 as housing values never escalated dramatically and employment stayed relatively steady.  Other markets saw significant value erosion and defaults.  Typically, the center part of the country (Midwest), modest-sized cities/metro areas (not top 10), fare better.  High cost, coastal communities and large metro areas (New York, Los Angeles, Philadelphia, San Francisco, etc.) experienced high volatility and value erosion in 2008 to 2010. I don’t see, as of now, a repeat such as 2008-2010 but these same markets have other dynamics at-play (high crime, rising tax costs, etc.) that are negatively impacting their residential real estate markets.



April 10, 2023 Posted by | Health Policy and Economics, Senior Housing | , , , , , , , , | Leave a comment