The COVID years hit several real estate sectors hard. Lodging and retail immediately jump to mind. But maybe the hardest hit sector was senior housing, especially the long-term care facility (LTCF) or skilled nursing home and assisted-living subsectors. Instead of a safe harbor for frail or ill seniors, LTCFs and assisted-living facilities became Petri dishes of infection. In the early days of the pandemic, nearly half of all COVID deaths were in LTCFs, according to the Kaiser Family Foundation. By the end of January 2022, that percentage had dropped to about 23 percent, which is still an unprecedented amount of death.
Although other senior categories — independent living, active living, memory care, etc. — weren’t hit as hard, the perception was baked in. Senior housing was dangerous for seniors.
That’s a hard reputation to come back from.
But the industry is, indeed, bouncing back. The progress might be slow, but it is steady.
THE COMEBACK TRAIL
According to the most recent MAP Vision report from the National Investment Center for Seniors Housing & Care (NIC), average senior living occupancy grew 90 basis points to 83.0 percent in the fourth quarter of 2022, representing the sixth consecutive quarter for growth in the industry.
The fact that occupancy has been steadily growing in the past six quarters is good news in itself, but a restrained development pipeline bodes well for future rent growth, as well. Overall inventory growth came in at just 1.6 percent in the fourth quarter. For fourth quarter 2022, NIC MAP Data Service reports only 3,013 senior housing units were started in the markets tracked by NIC, down from more than 12,000 starts in fourth quarter 2017. The third quarter 2022 number of 2,412 starts was the lowest number of construction starts since the global financial crisis days. Looking at individual categories, we find independent living inventory growth of 1.7 percent, assisted living at 1.5 percent and nursing homes at –0.8 percent.
Higher interest rates, supply-chain issues and inflation are likely factors in the development slowdown. As those factors mitigate, it is likely we’ll see development pick up again, and investors will need to be picky when it comes to development opportunities.
“From a development standpoint, we’re really looking for needles in haystacks,” explains Mike Gordon, global CIO at Harrison Street. “We focus on gaps in micro-markets, where new supply needs to exist. Our operating partners are very good at pursuing and tackling those sites and projects that others either can’t bring to fruition or are reticent to touch due to tremendous lead times, cumbersome processes, and required skill and tact.”
As with other multitenant assets, ground-up development can run into a multitude of barriers from NIMBY neighbors to local regulations to environmental restrictions.
“The vast majority of our development activity and development pipeline has been in predevelopment for years, thus speaking to the brutal approval processes in these markets,” adds Gordon. “When layering very high physical and economic barriers on top of that, these already undersupplied markets should see further supply/demand imbalances, and thus, the ability to push rental rates and generate attractive development yields.”
Despite the challenges imposed on new development, more facilities will be needed in the future because demand should continue to grow. In the NIC MAP Primary Markets, the total number of occupied units in fourth quarter 2022 exceeded 574,900, surpassing its pre-pandemic first quarter 2020 level by nearly 7,000 units and setting an all-time record for the number of units occupied.
“More older adults than ever before are now residents in senior housing properties, which speaks to the tremendous need for senior housing and care services,” says Chuck Harry, NIC’s COO. “The demand from aging adults seeking senior housing and care is on the rise, and the industry continues to meet that need.”
There is no reason to believe this demand trend will reverse. Over the next five years, ESRI, a demographics research group, forecasts the 75 and older population will grow by 18 percent and will double by 2045.
“The good news for the sector is that — at least based on what we’ve seen in the past — assisted living is recession-resilient because it’s a needs-based product,” says Beth Burnham Mace, NIC’s chief economist.
A needs-driven asset class is exactly what investors look for in unsettled economic times. Historically, senior housing has been able to weather the ups and downs of various economic cycles, which is good news for investors and economists unsure as to whether the United States is looking at a recession, a slowdown or maybe a continued inflationary environment.
“These communities perform very much like healthcare communities, where the demand side of it is not necessarily tied to the fluctuations in the economy,” says Shlomi Ronen, managing principal and founder of Dekel Capital. “During the last recession, senior housing was one of the better-performing asset classes in commercial real estate.”
BEING PAID FOR THE RISK
Any investment sector with rising demand and constrained supply, improving tenancy and rents — and thus a steady stream of income — plus the possibility of capital gains through appreciation over time will attract investors’ attention. Add a history of stability in any economic climate, and it’s no surprise that senior housing is on everyone’s interest list.
Despite checking several boxes in the “advantages” column, however, senior housing is not for everyone. In times like this, investors often fall back on the safety of core assets, but senior housing is not typically a core investment. In fact, it usually falls on the higher-risk end of the spectrum because it isn’t just about the property — it’s about the management that is running the facility. Owners aren’t just renting space, they are providing a 24/7 service through a third-party business partner. The quality and expertise of the partner, especially its ability to solve unforeseen problems, can make or break an investment.
For example, one of the lingering results of the pandemic is a lack of workers. To fully staff a facility, managers will need to raise wages, improve benefits and/or reduce the number of tenants. Even with these changes, many facilities are finding it hard to hire and retain staff. A facility that fails to meet its residents’ needs will eventually find its tenancy falling as seniors look elsewhere.
“Our partners’ focus on the importance of catering to their employees has led to what we believe are some of the lowest employee turnover in the industry, which is a huge advantage in a tight jobs market and an inflationary environment,” Gordon points out.
Management must not only excel at handling resident and staff concerns, it must be able to manage the property. Good management will look for novel solutions to old problems. For example, many senior housing developments are incorporating sustainable features, such as energy-efficient appliances and low-water landscaping, in order to reduce their environmental impact and operating costs.
Besides management concerns, senior housing faces a few other obstacles unique to its business. Chief among them is regulatory risk. The senior housing industry is heavily regulated, and changes to regulations can impact the operation and financial performance of a senior housing property. Recent federal and state regulations growing out of the pandemic have focused on maintaining staffing ratios, improving infection control and other requirements for patient care.
This business overlay on the real estate property makes investing in senior housing closer to a private equity investment than a direct real estate investment.
“As an operating business, senior housing can be a lot more volatile than a multifamily property,” says Ronen. “But in the same vein, you should not be investing in senior housing at the same return expectations as you would a more traditional commercial real estate investment. You should be getting paid for that additional business risk. If you are putting it in a return bucket, it probably should fall more in the value-add or even opportunistic area as opposed to core.”
Development risk is also high. As mentioned earlier, development often includes factors that take years to resolve. As a result, some of the most active owners are avoiding new development and, instead, refurbishing or repositioning existing facilities, particularly if they are well located and were a viable enterprise before the pandemic.
“In today’s market, we’re buying relatively new communities at a very significant discount to replacement cost and underwriting returns that are akin to development,” says Ronen. “So, there’s really no need for us to go and take development risk on top of the turnaround or lease risk that we’re taking in a lot of these communities.”
“There are so many markets where the existing supply is a mismatch with the needs of the local population, and we’ve come across a lot of markets where the right turnaround plan from an operations and physical perspective really increases demand for our offering,” adds Gordon.
To paraphrase Will Rogers, “Those who stand still get run over.” The senior housing industry doesn’t expect to get run over. Instead, it is evolving as its target population evolves. Seniors are no longer interested in bingo and line dancing. They want to continue to live the lives they’ve been living, just in a supportive environment. That means facilities that are attracting the most interest are providing additional wellness amenities, such as fitness centers, therapy pools and walking trails, as well as activities such as technology labs, book clubs and even virtual reality tours of museums and the many wonders of the world.
“In our latest community, we built a test kitchen,” says Ronen. “It’s almost like going on a cooking show. Residents have their own cooking stations facing a chef who walks them through recipes for the meal of the day. Residents can follow the recipes exactly or add their own twists. Other communities might feature a wine tasting event or other activities that recognize that the residents want to continue to socialize, learn and grow.”
When looking out over the next several years, two of the fastest growing segments are expected to be assisted living and memory care. Assisted living can range from simply providing meals in a shared dining room to helping with basic hygiene issues. These facilities allow seniors to age in place, which surveys indicate is one of the primary draws for residents renting an apartment in an assisted-living facility.
As part of the aging in place movement, one of the newest sectors to enter the senior housing investment world is the active-retirement community. As residents who bought into the community years ago begin to need more care, independent living, assisted living and nursing care facilities are being added so they can stay among their long-time friends in a community that supports them.
As the population ages, the prevalence of age-related cognitive decline, such as Alzheimer's disease, is increasing. This has led to a rise in the number of memory care facilities, which are specifically designed to support seniors with cognitive impairments. These facilities are often a special section in a traditional assisted-living center, where residents can receive the specialized assistance they need while accessing the amenities of the larger facility.
The baby boomers are finally reaching senior citizen status (assuming 75 is the new 65). This is the time when pundits years ago forecast a wave of elders entering senior housing. In reality, that wave hasn’t happened. Seniors have remained active and in their own homes longer than any previous generation. But it doesn’t mean this cohort and the ones to follow won’t eventually need assisted care. They likely will.
But the industry isn’t waiting. Instead, what was once simply a nursing home industry has become an active community, an independent living, an assisted living, a memory care (with lots of physical activity available), and a nursing home industry. It is meeting the market where it is, not where it was assumed to be.
As such, the industry is providing investors with stable, value-added returns for those who have a long-term vision. As long as there are seniors, there will be a need for senior housing.
Sheila Hopkins is a freelance writer in Auburn, Ala.