Senior Housing has had a long, slow grind toward recovery, post-pandemic. Fitch classified the Life Plan component as “deteriorating”. Among the many challenges the industry sectors (Independent, Assisted, Life Plan) faced, access to capital and access and maintenance of dependable and qualified labor are the two most challenging.
COVID shaved occupancies rather substantially. Pre-pandemic, as a sector, senior housing occupancies averaged 87.1%. The pandemic low was almost ten percentage points off the high at 77.8% (2020 for the high, mid-2021 for the low). Today, the average occupancy has crept up to 84.4%. Some data points worth noting are;
- Demand, defined by unit absorption, remains strong – 3 x new inventory. In definitive terms, 7,853 units were occupied in the quarter versus an inventory increase of 2,806. Demand has exceeded inventory changes for ten consecutive quarters.
- Assisted Living occupancies, while growing ever so slowly, remained constrained at 82.6%. This is nearly the same level of occupancy as skilled nursing. Labor availability to meet additional care need demand has hampered occupancy growth.
- Independent Living (properties primarily comprised of Independent Living units) came in at 86.1%, up from 85% for the past couple of quarters.
Key to the growth in occupancy has been the significant constraint on new development, principally due to capital cost and access challenges as well as construction cost increases. Demand remaining strong, has positively filled existing inventory.
As a significant portion of single site development (new properties or additions to existing properties) is financed via middle market banks (state and regional), the balance sheet challenges of this sector of banking have shifted credit facilities. Credit is not only more costly (rate), but loan to values on projects are also lower, necessitating infused equity for projects (free cash) to move forward.
In some cases, capacities at various banks (ability or willingness to extend credit to one borrower) have changed (reduced), necessitating syndicate loans which, are more expensive to originate and slower to cobble together. Suffice to say, these forces and conditions, along with higher construction labor and material costs, have slowed new development to a multi-decade low.
Another factor that has risen as a result of slow to almost no, new inventory growth is aging properties. In other words, the average age of properties in the sector of senior housing is creeping up and the older the property, the greater likelihood of occupancy challenges.
Properties 25 years and older now account for 41% of the senior housing sector, up from 34% pre-pandemic (2020).
- This older cohort has the largest share of properties with occupancies that are 80% or lower, driven by several factors (older floor plans that no longer meet consumer needs, unit layouts that don’t include larger storage, open kitchens, in-unit laundry, etc.).
- The younger cohort of properties, 10-17 years, has the highest share of occupancy rates at 90% or higher, likely a result of newer units and layouts (more amenities) and enough years of stabilized occupancy and brand recognition in the market.
The challenge for older properties is all around re-development, for additional investment and to be competitive. Market demand for units by space and amenities has shifted considerably, illustrative of the general trend shift in residential real estate. Residents will prefer projects with,
- Open kitchens, full-size appliances.
- Adequate, in-unit closets and storage.
- In-unit laundry facilities.
- Bedroom separation and adjacent bathrooms.
- Master bedroom with attached master bath.
- Open concept living.
Lifestyle communities are also growing in popularity, emphasizing additional amenities across the community, not just unit amenities.
- Entertainment rooms.
- Fitness centers.
- Wi-Fi/High speed internet.
- Outdoor living spaces with entertainment space and grills/kitchens.
- Pet friendly areas.
- Car wash facilities.
- If available space permits, outdoor fitness features such as Pickleball courts.
The NIC 3rd Quarter occupancy data is the primary source for the data points above and graphics. It is available here: https://www.nicmapvision.com/blog/nic-map-vision-3q23-key-takeaways-senior-housing-occupancy-rate-increases-for-ninth-consecutive-quarter/?utm_source=marketo&utm_medium=email&utm_campaign=es_2023_11_02_3q23_takeaways_blog&utm_term=3q23&utm_content=blog&mkt_tok=MDE2LVFKTC04NDgAAAGPMHzgNRUYi7NOcsUREnofVRsax41bSdM2v6BYdYm4-vCskq6MPSbNiNeYtWPr2V-TGIlEgW8DU-Z5oLg6MgsvDL7-7IpwhKlyO3nW4g