The smallest distinct segment of senior housing is Life Plan communities or CCRCs. Assisted Living, Independent Living and Skilled nursing, in each segment, dwarf the number of CCRCs yet, CCRC popularity remains and continues to grow, if ever so slowly.
CCRCs run a gamut between large and small, entry fee to rental, with/without SNFs yet always including some extended care services beyond the housing component. In recent years, I’ve watch CCRCs smartly, expand their service offerings to include home health and personal care, hospice in some cases, and other wellness and medical/care services. Typically, the larger the CCRC or sponsoring organization, the greater the service array (home health, personal care, etc.).
The industry remains dominated by non-profit owner/operators. For profit organizations account for about 25% of the industry, the balance is thus, non-profit. Size as measured by units/residency is largest among non-profits. Additionally, the non-profits dominate the entry-fee CCRC market.
For the last two plus years, COVID has had a profound impact on all senior housing organizations. The fallouts from the pandemic include a diminished workforce (fewer health care and support) workers, inflation, and rising interest rates have hurt all providers and driven all kinds of compensating behaviors such as reducing census due to staff shortages, escalatory pricing, service reductions, etc. CCRCs have not been immune to the pandemic fallouts but have weathered the pandemic and the fallouts better than their segment partners (e.g., Assisted Living and SNF). Similarly, we watched CCRCs experience fewer COVID health impacts (outbreaks, deaths, etc.) than Assisted Living or SNFs.
Through the first quarter of 2023, CCRCs have experienced a steady but slow increase in occupancy. At the start of the quarter, occupancy was still behind pre-pandemic levels at 87% (compared to 91% pre-pandemic). Non-profit CCRCs had stronger occupancy performance than their for-profit counterparts – 88% v. 84% respectively. We also see entry-fee communities outperforming rental communities, 89% to 84%.
In terms of rate and inventory, there has been a shift from pre-pandemic levels. Inventory (units for rent) shifted the least for non-profits and where reductions occurred, they did so in nursing care. For-profits had the biggest inventory shifts, across all living accommodations (independent, assisted and nursing). Rent increases are harder to factor but as occupancy has recovered, inflation and labor factors settle-in, we are seeing rather aggressive pricing shifts. Senior Living in general has seen rate increases in the range of 8 to 10%. Diving into living segments, we see memory care and smaller Independent Living units (one bedroom, studios) increasing the most – 9% to 10% – with studios running at 8% plus, the same as Assisted Living. CCRCs tend to have different pricing packages at the Independent Living level vs. at the care levels. Many incorporate various discounts for residents as they transition to the numbers of actual realized rent v. published or asking rent can be quite different (Sources: NIC, LivingPath.com)
As 2023 progresses, there are a number of headwinds for CCRCs still trying to recover from the pandemic and its related fallouts and impacts. Below is my watchlist for the remainder of the year. I’ll touch base on these items from time to time throughout the remainder of the year.
- Interest rate rises will impact cost and access to capital for CCRCs. These organizations tend to be capital intensive as their marketability is tied to heavily amenitized environments requiring constant updates, improvements, refreshment, etc.
- Rising rates have also severely impacted the residential real estate market. New CCRC occupants typically move post a primary home sale. The inability to effectively liquidate their real estate to pay an entry fee will harm occupancy increases. Most CCRCs have units for sale. Depending on the market location, this impact could be very, very profound for the balance of 2023 and perhaps, beyond. The good news is that homes for sale inventory is low so price reductions have not been (yet) dramatic.
- A marketing strategy often deployed by CCRCs is some form of rent suppression, rent reduction or abatement for a period of time to “sell” a unit. Revenues are already suppressed due to lower occupancy and, likely rent suppression in general during COVID. Revenue recovery will be a function of occupancy and the ability to increase rates to accommodate rising costs. This will be a tricky navigation for most operators/sponsors for 2023 and in my view, early 2024 as well.
- Labor will continue to be a major problem hampering occupancy, service expansion, and increasing cost. I don’t see any labor challenge abatement any time soon, beyond 2023.
- In established CCRCs we will continue to see an increase in resident age and debility and a similar trend on admission. This trend, especially on admission, is a lingering pandemic problem as folks avoided moving to CCRCs during the pandemic. As they do now, they are generally older and more disabled.
- Wealth reduction due to market losses will cause some seniors to remain, ill-advised, at home. Couple the liquidity issue (stagnant) on real estate sales (bad market) and estate shrinkage due to investment losses, an impact in qualified seniors for any CCRC but especially, entry fee CCRCs, has occurred. Recovery will not occur in 2023.
- The demand for CCRCs is very elastic such that, there are a number of substitute options available to a senior, such as staying at home with services. As real estate liquidity is a challenge now, the demand curve has shifted a bit similar to what we saw in 2008 to 2010. Expect this shift to remain in-place for at least all of 2023 and likely, until mid 2024.