Fourth quarter data is out from the National Investment Center regarding senior living/senior care occupancies and the trend remains positive. See the NIC summary here: 4Q23-NIC-MAP-Market-Fundamentals-PDF
- Senior Housing occupancy, 4th quarter, came in at 85.1%, up 80 basis points from the 3rd quarter.
- Nursing home/SNF occupancy rose to 83.1%, up 70 basis points.
- Assisted Living occupancy moved up to 83.4%, plus 90 basis points.
- Independent Living properties (primarily IL units) moved to 86.8%, up 80 basis points.
Bolstering this positive trend is decent demand plus, a very slow development market that is generating minimal new units/project starts. This condition continues to help existing projects recover occupancy (pandemic influenced) as there simply are not many new projects coming on-board, allowing existing providers to grab incremental resident moves.
Transaction volumes in the fourth quarter remain significantly depressed. Cap rates (capitalization rate) are hanging in the low 6% range. IL (primary) transactions may see cap rates, for good location, strong occupancy properties below this level where nursing homes, would likely see cap rates above this level – 8% and above.
While occupancy gains continue, there is some deeper analysis that is required to determine how the trend may morph or stabilize, even shift negative, into 2024.
- Staffing challenges continue and, in some regions/locations, are deeply imbedded. Not being able to acquire enough and of the right mix of staff, will cap occupancy, particularly in SNFs and Assisted Living/Memory Care. Even IL properties can have some adverse impacts from insufficient numbers of workers.
- For IL properties, especially CCRCs/Life Plan communities, the tight, nearly illiquid residential real estate market influences demand. While underlying demand may remain strong for IL units, the inability to sell a private residence at a particular price due to insufficient numbers of qualified buyers, will (and does) restrict moves. This is a very profound challenge for entry fee communities.
- Demographic shifts and value shifts among certain seniors have shifted senior living demand, somewhat. Don’t ignore this trend going forward as the shift is real.
- Lifestyle communities are gaining steam (interest) and pulling seniors away from traditional, retirement community models (primarily congregate housing).
- Higher acuity Home Health Agency services are impacting SNF referrals and lengths of stay. Occupancy for SNFs is a function of referrals and lengths of stay (shorter stays require more referrals to boost occupancy levels). The erosion is less noticeable (now) due to staffing constraints but if (and when) staffing becomes stronger, higher acuity home health (SNF at home) will bite nursing home referrals.
- Price creep in AL and IL is pricing some seniors out of the market, shifting the referral base away from some outlets. Rent growth has been steep to keep up with inflation and rising labor costs. In turn, due to market volatility, estate values and incomes have not kept pace. Many forms of senior housing/senior living are very price elastic and if the price expressed as cost of monthly services becomes to steep, demand will shift to other options.
- According to the New York Federal Reserve, the probability of a recession by mid-2024 is high – 66%. A recession will undoubtedly, temporarily shift certain elements of demand. This is according to their modeling of the Treasury Yield curve and the slope (aka spread) between the 3-month T-Bill and the 10-year Treasury Bond. To determine the spread, subtract the short maturity from the longer maturity. A negative spread and the size thereof, is the strongest indicator (economic) of economic contraction or recession. This metric has been highly predictive of a recession since its inception. More on the yield curve as a forecast metric for expansion/recession is available here: https://www.stlouisfed.org/on-the-economy/2023/sep/what-probability-recession-message-yield-spreads Current yield graphs are below, via the New York Federal Reserve.
