On Wednesday, the Federal Reserve added another .25 point to its baseline interest rate – federal funds rate. The rationale is to continue to reduce inflation which, is running at decade highs. The trickle-down effect will begin with capital costs and capital access, impacting all kinds of industries but first and foremost, the real estate industry (commercial and residential). Borrowing costs and access to funds has changed dramatically since 2020. In mid-2020, mortgages were widely available below 3% fixed for 30 years. Residential real estate rode a significant wave in rising housing prices and rapid sales.
Today, the residential market has ground to a near halt. While home prices remain steady to a large extent, buyers have fled due to high mortgage costs and bank lending constriction. Recent bank failures have not helped banking confidence or improved lending access, personal or commercial. As a result of the Fed’s need to fight inflation and to reduce overall liquidity in the monetary system (lower money supply), the Fed quit buying mortgage-backed securities in March, therefore no longer directly supporting the mortgage market. Without the Fed keeping the liquidity of the mortgage market “up”, mortgage rates will remain higher for a longer period and banks will be pickier about lending as the buyers for mortgages are now private entities, more concerned about profit and the underlying credit.
So as not to confuse my readers, the title of this post is right-on and while a bit of economics starts this post, it is relevant to senior housing. Senior housing, especially independent, above-market products rental and entry-fee are very much occupancy impacted by the residential real estate market. I have written and spoken about this connection for years. The typical senior housing move is a transition from a private residence of some sort with the proceeds from the sale, used as a resource for the senior housing stay. With entry fee sales, the net proceeds from the home sale very much correlates to the resource for the entry fee. Market data has shown us for decades that there is a very strong relationship in the sales process between what a resident in a market area can liquidate his/her residence for and what the net proceeds will “purchase” in term of a CCRC unit. Well positioned CCRCs in a market have entry fees very closely tied to the average net sale value of homes in the primary market. Even today, few seniors will want to dip into estate values to pay for a senior housing unit. A good resource is a presentation I did a few years back: Value Propositions and Markteting 4 14
The primary factors that drive new sales and work on impacting occupancy positively, are as follows.
- Demographics in the target market – age, net worth, income level favorably matched against the product (price, demographic, location)
- Overall supply of units in the market current and anticipated. Senior housing demand is very elastic. Supply ranges of product will shift based on the price and the economic conditions within the market area.
- The condition of the residential real estate market in the primary market area. While national trends are one thing, the translation of those trends locally is the key. Not all local markets fare equally to the national trend. Interest rates aside, a growing market may attract more buyers still willing and financially capable of buying homes, even at a premium (see Florid for example).
- The condition of the property/senior living site. Is it in good condition and is its reputation positive.
The trends in occupancy and thus, marketing have shifted dramatically as a result of the pandemic. Occupancy in rental and entry-fee projects for the most part, remain below pre-pandemic levels. While CCRC occupancies are strongest and still growing (albeit slowly), at the present course of improvement, we are approximately 2.5 years away from pre-pandemic levels (91% vs. 87% today). This time period may elongate if interest rates remain high and real estate inventory (for sale), remains low.
During the pandemic, to maintain and attempt to increase occupancy via sales, I noticed a lot of communities resorting to incentives of one form or another. Fortunately for the CCRC/senior housing market, new inventory slowed and remains slow. Existing units today, have a greater opportunity to gain ground as new product is not coming on the market with the same fluidity as pre-2019. Capital access and costs have abated many new, planned projects either permanently or temporarily.
Incentives have long been a staple of generating unit pre-sales, holds, and interest/waiting lists. Conversion to occupancy often includes different incentives, directly tied typically, to rent abatement or stabilization (so many months free, no rent increase for so many months, etc.). Other softer incentives include moving fees (pay for the move), meal additions, decorator services, relocation coordination, etc.
The road however today, is bumpy and will be so for a while. Two difficult financial/economic conditions are at-play and both, hamper demand when the desire, is to sell above-market cost units. First, the real estate market in terms of liquidity, is exceptionally slow. New listings lag from pre-pandemic levels and new sales the same. A good data source that I use to watch these trends is here: https://www.redfin.com/news/data-center/
The second condition is overall estate values are down. Seniors with market investments in their retirement plans have seen minimally, on average, a 25% erosion in value. This constriction reduces their willingness and confidence to buy into, more expensive (real or perceived) housing. Further, familial support or influence tracks a similar downward confidence curve meaning, family become less supportive of a move that is further perceived, as negative to estate values. Remember, the U.S. mindset still has a strong connection to passed-through or down wealth transfer (e.g., kids receiving inheritance from mom and dad).
Strategies do exist for CCRCs and other senior housing projects to make inroads in occupancy gains, even in a tight market. Here are a few that I have used and can recommend as having some value.
- Use equity and/or internal financing mechanisms to assist in achieving liquidity for a senior’s home. Banks will typically step forward if the home has substantial equity and are often willing, if the CCRC is a partner, to provide the loan allowing a move to occur. The challenge then falls on maintaining the vacant property but that is less difficult than one would think with a bit of creativity.
- Defer the entry fee to a later date. Take the move off the table so to speak, allowing the senior to move while the house is still on the market, even if the timeframe is elongated. Another option is to pay the entry fee in installments.
- Work with a realtor that will package a transition service at a reduced commission allowing for home sale/pricing flexibility.
- Purchase the home, if feasible. I have seen organizations do this and then, when market conditions change, resale the home. This is complex and fraught with all kinds of detail issues, but it can be done.