Why the Tide Is Turning for the Hard-Hit Senior Housing Market

Sentiment within the senior housing real estate sector is beginning to shift among investors as green shoots emerge and point to strengthening market fundamentals, recovery, and growth. The sector, which faced operational headwinds prior to the pandemic and significant operational decline during, shows positive rental growth, increasing net absorption, and limited new deliveries. 

According to JLL research, senior housing rents were 17 percent higher at the start of 2024 over the same period in 2020.  In addition, occupancy rates have increased to an average 86.3 percent in fourth quarter 2023, representing a recovery to pre-pandemic levels and noticeably higher than first quarter 2021 where occupancy rates stood at 80.3 percent.

Similar to other CRE segments, construction starts have slowed significantly across the country due to the more expensive financing environment and elevated construction and labor costs. Moreover, the capital markets currently favor acquisitions given the favorable pricing dynamics relative to new construction.  With very limited new supply, the inventory that is here today is, for the most part, the inventory the market will see for the next three years.

In line with the broader commercial real estate market, transaction volumes in the senior housing and nursing care space marked a notable decline last year due to higher financing costs and market uncertainty, dropping 33 percent year over year as of end of 2023. 

Through most of 2023, private buyers were dominant in the senior housing assets market, stepping up as institutional liquidity took a pause. In 2023, private buyers comprised 85 percent of the buyer composition up 11 percentage points year-over-year and marking the highest share in recent cycles. However, 2024 has seen the return of the institutional investor with both those previously on the sidelines and new entrants looking to enter the market keen on harnessing the long-term potential this sector promises. With more robust participation we are seeing more aggressive bids and more lift between bid rounds. 

Commensurate with rising interest rates, 2023 saw an erosion in value that stabilized post-labor day. During this period, capitalization rates for senior housing  expanded by approximately 150-200 basis points from the market peak before the Fed started raising interest rates, reaching around 7.25 percent on average by year-end 2023.  However, recent transaction activity has exhibited some green shoots which seems to indicate the early stages of a period of cap rate compression. 

Senior housing in the year ahead

The senior housing and care industry is on a striking path of growth driven by demographic changes, strategic investment opportunities, and a marketplace that continues to adapt post-pandemic. As such, interest in senior housing investments is expected to remain strong as investors continue to seek higher yields from alternative asset classes that stand to benefit from long-term demographic tailwinds.  

With the expectation that the 75-plus demographic will nearly double by 2045, the demand for senior housing is set to surge, presenting substantial opportunities for investors with a long-term outlook.

While financial conditions remain challenging for new construction starts in the coming months, demographic patterns show opportunity for continued senior housing development.  That said, with a few exceptions, we expect construction to remain significantly depressed until such time as industry occupancy climbs above 90 percent with additional significant rate growth.

Opportunities will continue to exist for investors to acquire high-quality real estate at below replacement cost for the next 12 to 24 months.

The overall sentiment that the market has hit rock bottom coupled with a growing consensus that interest rates have reached their peak should translate to a more stable outlook for senior housing valuations moving forward. 

With many of the prior challenges in the rearview mirror, senior housing has reached a pivotal moment in recovery and is fueling investors’ appetite to jump back in and reexamine the opportunities. 

As the industry looks ahead, there is a bright future for senior housing.  

Jay Wagner and Rick Swartz are JLL Senior Housing Group co-leaders.