Since the pandemic (COVID), capital investment in senior living has been disjointed (to say the least). The pandemic constrained demand and as the economy rebounded from periods of lockdowns, supply shortages, work reductions, etc., inflation snuck in. In turn, to battle inflation, the Federal Reserve steadily raised interest rates. The rise in rates changed the cost of capital landscape significantly.
This post is a bit bifurcated as to look forward, getting our bearings via a look back, is important. I’m not jumping into the way-back machine more, to the last six to twelve months or 2024.
The Year that Was – 2024
The start of 2024 was rocky as lending was slow and credit markets for bonds were not favorable rate or terms wise, for the most part. Rated entities had some leverage but unrated deals were pricey and complicated by LTV constraints and covenants more onerous than usual. Private equity was a leading option but only for certain types of transactions, mainly M&A.
As 2024 progressed, slight improvements began to take hold. According to the National Investment Center (NIC), new permanent loan volumes for senior housing increased by over 200% from the first quarter of 2024, surpassing $2 billion. This growth indicates a rebound in lending activity, with levels exceeding those observed at any point since 2020. Loan volumes for nursing care also rose by nearly 60% in the second quarter of 2024, reflecting a more measured and gradual recovery for the nursing care sector amid improved Medicaid reimbursement rates and occupancy trends.
New mini-perm and bridge loan volumes remained low for both senior housing and nursing care in the first half of 2024, reflecting continued concerns among lenders. High borrowing costs, driven by the Federal Reserve’s fed funds rate of 5.25-5.50%, cramped short-term lending. These factors make bridge loans less attractive to buyers and more difficult for lenders to underwrite.
Construction lending remains stagnant and the outlook for new units, well below market demand trends. The good news/bad news is that low construction starts over the past three plus years have allowed for existing unit absorption and fueled occupancy gains. The bad news is that demographic trends that are creating senior living/care demand imply significant unit shortage (to meet demand) in the next three to five years. The high cost of borrowing and uncertainties surrounding the sector’s operational challenges have further restricted new development.
Another datapoint worth noting for 2024 is delinquencies and/or bankruptcies. Delinquency rates for senior housing loans peaked last year and continued to improve in 2024, declining for the past three quarters. In the first half of 2024, delinquencies represented 3.9% of total loans, down from a peak of 4.4% in late 2023.
Delinquency rates for nursing care loans have risen for three consecutive quarters, reaching 2.7% in 2024, up from the low of 0.6% in late 2023. This increase points to ongoing operational challenges in the nursing care sector. Additionally, foreclosures reported in the first half of 2024 totaled $51.8 million for senior housing and $43.2 million for nursing care, indicating continued pressures facing borrowers in both sectors. More on the bankruptcy trend from 2024 is from an August post I wrote: https://rhislop3.com/2024/08/15/senior-living-bankruptcy-trend-remains-alarming/
Outlook for 2025
This early in a new year, forecasting how twelve months will accumulate with respect to capital markets is a bit like forecasting the next year’s Major League Baseball season and World Series – an educated guess or maybe, a WAG (wild ass guess). That said, there are some pluses and minuses that illustrate some improvement is likely, albeit modest in my opinion.
An early indicator worthy of some note is Fitch Ratings outlook for Life Plan (CRRCs) communities. Fitch, after two years of a “deteriorating” outlook has modified their outlook to “neutral” The biggest influencers in the change are real estate price growth, abating inflationary pressures and lower interest rates. These forces will keep the industry largely treading water and demographics will work in the sector’s favor with occupancy at most life plan communities, per Fitch. Fitch Revises Sector Outlook for U.S. Life Plan Communities to Neutral for 2025
As the year begins, the fundamentals for senior living and skilled nursing have improved, if ever so modest. Occupancies are solid, still rising modestly, and while rate increases have moderated, operators are still able to achieve higher revenues via rates. This is in a large part due to increasing competition (demand) due to supply constraints. New units coming to market will remain at or maybe just slightly above, the prior two-year trend.
Providers will need to navigate supply-demand issues, higher construction costs, evolving consumer preferences, and affordability pressures. In responding to demographic growth, providers must be attuned to what residents are willing and able to pay, trying to find the balance between quality and cost.
In terms of staffing and regulatory and reimbursement challenges, only modest improvements are likely, if at all. Staffing challenges will remain as the demographics at this point do not favor more staff supply vs. demand. Further, overall healthcare consumption of available hours will continue as all employer options (hospitals, payers, other providers) will continue to seek professional-level staff.
A new administration (Trump) implies some regulatory relief but the same via political change is always slow to occur. At best, curtailing administrative law changes around the staffing mandate (for SNFs), and a return to prior Trump initiatives for SNFs. For example, his administration’s 2019 proposed regulations would have reduced the frequency of facility assessments from annually to biennially, removed the requirement that an infection preventionist work at a facility part-time, and removed the 14-day prescription limit for psychotropic drugs.
In terms of access to capital, economic conditions throughout the year will determine not only cost but terms. As of this point, a softening of Federal Reserve monetary policy has done little to change investment or lending appetite in senior living and care. The bond market is illustrative of the disconnect between Federal Reserve policy and capital cost with the 10-year Treasury rising steeply since the Fed began rate cutting (88 bps since the September 2024 rate cut). Treasury yields are more indicative of commercial credit costs.
At the December Fed meeting, Chair Powell indicated that the overall outlook for additional rate cuts was on balance, perhaps two (down from an original forecast of four), depending on economic conditions. As January arrives, we know inflation has yet been tamed and has actually risen across the last three months marking November. Employment data suggest weakness, especially in nearly all private sectors. Consumer sentiment remains low and holiday shopping consumption, minus price inflation, appears poorer than expected.
The mixed signals to me suggest that the capital conditions currently present will remain in-place or perhaps even worsen just a tad due to increases in capital costs (Treasury increases) for the first quarter, maybe into the second quarter. Bank lending will remain more expensive and more condition-laden than pre-pandemic.
In terms of delinquencies and bankruptcies, there may be a quick resurgence after the moderation across the back half of 2024. Following a steep increase in Chapter 11 bankruptcy petitions immediately after the pandemic, defaults slowed for a couple of years. However, the long-term care sector is now about to experience a second wave of distress. That wave is driven by more than $10 billion in senior living loans due to mature in 2025. At higher interest costs and likely, tougher refinance covenants, the probability of delinquency on maturation increases.
A wild card that hangs in the near-term balance is whether or not the economy will rebound quickly with a change in economic leadership via Trump and his administration. History says wholesale improvement takes time. In all reality, I’d put a recession at the same level of probability as rapid economic expansion. The latter could push the Fed to raise rates and the former, escalate rate cuts. Stay tuned!