Optimism in senior housing sector?
by Murray Wolf
Despite some rather discouraging data, purveyors of senior living facilities say that their business might be one of the most successful commercial real estate sectors in 2010 and beyond. That was a common theme of several of the sessions held during the annual conference presented by the National Investment Center for the Seniors Housing & Care Industry (NIC) Sept. 23-25 in Chicago.
"So far, we have fared relatively well in this worst recession in 70 years, and we are poised well for the future," said Kathryn Sweeney, managing director, U.S. Senior Housing, The GPT Group, and NIC chair. Those comments were part of her "State of the Seniors Housing & Care Industry" presentation.
This cautious optimism – which seemed to be shared by many of the presenters during the three-day NIC conference – came despite some recent bad news in the areas of new development and occupancy rates.
The "2009 NIC/American Seniors Housing Association (ASHA) Seniors Housing Construction Trends Report," which was released during the conference, found – not surprisingly – that construction activity has slowed because of the lack of financing available for developers and the continued pressures from the overall economic recession.
The report was based on data provided from the NIC MAP Data and Analysis Service, and included properties under construction in the nation’s top 100 metropolitan markets. Property types included senior apartments, independent living facilities (ILFs), assisted living facilities (ALFs), skilled nursing facilities (SNFs, more commonly known as nursing homes) and continuing care retirement communities (CCRCs).
The NIC report measures the number of construction starts for senior housing developments based on the number of units. On that basis, construction starts were down 37 percent for the 12 months that ended March 31 compared with the previous 12 months, and down 45 percent compared with the 12 months before that.
Even CCRCs, which have been the darling of senior living developers in recent years, saw steep declines in new construction.
"While there were expansions to existing campuses that continued to take place, only a handful of brand new CCRCs started construction in the past year," ASHA President David Schless said. "The markets that have traditionally embraced the CCRC model are markets that continue to have the most activity, such as Boston and Chicago."
Another way NIC looks at the construction data is the volume of construction starts as a percentage of the current inventory of senior living facilities. From that perspective, NIC found that there were sharp construction declines in the independent and assisted living sectors. ILF construction starts as a percentage of current inventory declined to 0.6 percent during the second quarter of 2009 from 3 percent during second quarter of 2008, and ALF construction declined to 0.6 percent from 2.3 percent. SNF construction starts increased slightly during the same period to 0.4 percent from 0.2 percent.
The story wasn’t much better in terms of occupancy rates for existing senior living facilities. In other data shared at the conference, NIC reported that occupancy rates declined steadily from the low- to mid-90 percent range during the first quarter of 2007 to less than 90 percent during the second quarter of 2009. The declines affected ILFs, ALFs and SNFs almost equally, although nursing home occupancy declines were more modest during the past 18 months.
"As you can quite clearly see, all asset classes experienced occupancy declines," Sweeney told the NIC gathering.
In particular, NIC found that ILF occupancy declines became more widespread from the second quarter of 2008 through the second quarter of this year. The year-over-year decline in occupancy rates averaged nearly 2 percent. Particularly hard hit markets included Portland, down more than 5 percent, and the Cleveland and Pittsburgh markets, which were both down more than 4 percent. ILF occupancies declined about 1.5 percent in the Minneapolis-St. Paul market during that period, and the Chicago market was down about 0.5 percent.
Despite the bad news, many of the presenters during the three-day NIC conference found reasons for optimism.
There seems to be a correlation between the unemployment rate and ALF occupancy levels, probably because adult children often provide financial support for seniors who need to move into those facilities, Sweeney said. As employment increases, so does occupancy. Therefore, as the United States gradually climbs out of the recession and unemployment drops, it is reasonable to expect that ALF occupancy rates will rise.
Sweeney also said that there appears to be a correlation between the S&P/Case-Shiller Home Price Index and independent living occupancies.
"We do know that the sale of a home is a funding mechanism for many residents in independent living communities, so this connection is not surprising to us," she said. Thus, when home prices increase, ILF occupancies should also increase.
Even the lack of new construction has an upside, Sweeney said. The emptying of the construction pipeline is likely to benefit existing properties in the form of higher near-term occupancy rates, while ultimately driving up demand for new and expended facilities.
And, Ms. Sweeney noted, "Within the next 25 years, the number of older adults will more than double." This demographic fact, combined with the increasing desirability of the industry’s products and services, she said, presents "exciting opportunities" for the senior living business.
The NIC folks also pointed out that while senior living occupancy rates had declined during the previous year, those rates declined less than occupancies for other commercial real estate sectors, and rents actually increased. They noted that office occupancy rates were down 28.3 percent, retail down 2.4 percent, multi-family down 1.8 percent and hotels down a whopping 10.9 percent, whereas senior housing occupancy rates slipped just 1.8 percent. Likewise, rental rates for office space were down 8.3 percent, retail down 1.7 percent, multi-family down 3.3 percent and hotels down 9.5 percent, compared with a 2.2 percent rent increase for senior housing.
"Seniors housing is the only asset class that experienced rent growth … during this same period," Sweeney said. "Thus far, our industry has been more recession resilient than the other types of real estate."
Murray Wolf is the publisher and founding editor of Healthcare Real Estate Insights.